The current pandemic has greatly impacted our ability to work. Many of us are spending a lot more time at home, and some of us may have had our incomes cut.
If you have equity in your home, accessing it may be a good option. You can restructure your debt, improve your home, or both.
1. Cheaper Borrowing
Taking advantage of an FHE cashout refinance can reduce the amount you spend overall on your bills. For example, if you have been paying steadily on your mortgage for at least 12 months, you may qualify a refinance. If you’re up to date on your mortgage but only paying the minimum on your other bills, you’re probably not getting ahead.
If you have $10,000 in credit card debt, you may find that you can only make the minimum, so the interest rates are keeping your overall debt about the same.
More than 40% of American households carry credit card debt over each month. By taking money out of the equity of your home, you can wipe out this credit card debt, greatly reduce the amount you have to spend each month on your bills, and cut back on the interest you pay overall.
2. Simpler Qualifying
An FHA mortgage is easier to qualify for than a conventional mortgage. If you’ve been current for a year, your credit score will not have as big an impact on your ability to get an FHA refinance than it would on a conventional loan.
Be aware that the most you can borrow is 80% of the value of your home. If you’ve been in the home long enough for it to appreciate in value, or if you’ve made improvements to boost the value of the house, you may be able to borrow more than your original mortgage.
The money from an FHA refinance goes to two places. First off, it replaces your original mortgage by paying it off. Secondly, you get a check for the difference to do with as you please, though debt consolidations and home improvements are the most common reasons for a refinance.
3. Go From Unsecured Debt to Secured Debt
If your credit score is dropping because of signature loans, predatory lending, or credit card debt, an FHA cashout refinance is a great option. The reason that unsecured debt, or debt that has no collateral tied to it, is so much more expensive in terms of interest is that unsecured debt is riskier for the lender.
Take your FHA refinance cash and put it in the bank. Then you can either snowball your other debt, which means to pay off the smallest debt to the largest debt. Take out as many small debts as possible, and once the refinance cash is gone, roll all those minimum payments into bigger payments on the larger debts. As long as you’re tackling unsecured debt, you’ll make good progress on your credit rating.
You can also avalanche your debt, or pay it off by the highest interest rate. It should be noted that a debt avalanche takes a bit more patience. It’s exciting to wipe out small debts and see the balance go to zero. Avalanching isn’t as thrilling.
4. Become a Saver
If you have your mortgage at a bank, set up a savings account there and load the account with at least one payment. Continue to make your payments as usual, letting that money sit there. If you’re not good at saving, or if you are but your spouse isn’t, hide the money so only the frugal spouse can view the balance. As you can, add to this balance.
5. Control Your Thoughts About Money
If you’ve always thought of yourself as a person with no money, having money in the bank can be downright weird. Becoming a saver takes a completely different mindset. Be patient with yourself and take comfort in the knowledge that if something goes seriously wrong, you have an extra house payment at your disposal to keep a roof over your head while you work it out.
Get used to having this money parked in the account. Aim for two mortgage payments when you have some extra. If you have some equity and would like to improve your home, wipe out unsecured debt, or take other steps to get on a stronger financial footing, now is the time. Carefully review the sale prices of homes in your area. Talk to your banker about an FHA refinance.