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Right now, mortgage and home equity rates are historically quite low and easily come in under the 20% - 25% that many credit cards charge. We’ve already covered the three tools that allow you to use your home’s equity to your advantage in our Getting Cash Out Of Your Home article. With that knowledge in hand, we’re going to walk you through how those debt consolidation tools can fix your cash-flow problem by combining high-interest items like credit cards, auto loans, etc., into one payment, saving you a bunch of money every month in the process.

The basic idea here is this: your home has appreciated in value – either through an increase in the market, a bump up from your hard work (i.e. home improvement) or a combination of both – and is worth more than you paid for it. This is what we know as home equity and paying down your mortgage.

On the other side, you’re having a hard time dealing with the monthly burden your debts are placing on you. At hundreds or even thousands of dollars per month, the sheer interest alone could be more than you can pay. This situation has made life an unmanageable juggling act between trying to pay utilities, the mortgage and the money you owe on those high-interest credit cards and other debts. It’s a vicious circle where one missed payment usually leads to many others, which leads to penalties, an increase in your APR, FICO score damage, and on and on.

This is where your home, and its equity, can come to the rescue. Mostly, this situation is best served with debt consolidation through a cash-out refinance or home equity loan. Either way, your debts are paid off (and you only make a single monthly payment moving forward if you chose a home equity loan or HELOC). In most cases, this single payment is drastically cheaper than the sum of the previous ones because of the lower interest rate and longer time period the debt consolidation loan is spread over. Plus, now, if you’ve used the cash-out refinancing method (or possibly the other two as well), your payment may also be tax deductible. You save money on the payment and on your taxes – it’s good news times two!

Here’s a good example of debt consolidation in action. First, lenders will use a formula to determine how much of your home equity is available to you. For example, on a home that has been appraised at $200,000 where the owner owes $100,000 on the mortgage, the equation would work as follows:

Here, the borrower could get up to $60,000 out of their home through any of the debt consolidation tools we’ve discussed: cash-out refinance, home equity loan or HELOC. They could then pay off all three debts and still have $5,000 left at their disposal (if they so chose). Moving forward, instead of three separate payments, each with a high interest rate attached, they would only have one monthly payment – which would be lower than the sum of the previous three!

As you can see, this type of debt consolidation offers a lot to like: significantly lower monthly payments (due to lower rates); one convenient monthly payment; and the ability to deduct the new mortgage or loan interest on your taxes (be sure to check with your tax advisor).

Remember though that debt consolidation such as this is not a way to remove debt. Instead, debt consolidation is simply a way of rearranging it and spreading it out over more years. Yes, you will save money in the short term and improve your current cash-crunch. But you’ll end up paying more interest in total because the combined debts are now spread over a longer period.

This is just another reminder that it's very important that you understand the "ins" and "outs" of every financial situation. And that's why we're here and happy to help at 1-800-734-REFI. With our long background and expertise, you can be sure that you’re getting the loan that’s right for you.