Prioritize your Debt and Consider Refinancing

Personal finance columnist Liz Pulliam Weston, who writes regularly for MSN Money, summarized several debt pay-off plans, suggesting that each individual needs to find the plan that fits her needs. Debt management is a lot like dieting, requiring reduced spending instead of fewer calories, along with extra income instead of exercise. Dieting and debt management both require strong discipline, too.

Refinancing Your Way to Becoming Debt-Free

If you have debts to pay in addition to your mortgage, refinancing your home should be part of your plan. Gather refinancing information to see if you qualify for a cash-out refinance, which could be the quickest way out of debt. A cash-out refinance means that you increase the size of your mortgage and use the extra money to pay off credit card debt, car loans, student loans and any other debt. Typically, a home loan has a lower interest rate than your other debt. The only problem with a cash-out refinance is that many homeowners have lost equity in their homes due to recent decreases in home value, so they may not have the 20% or greater equity in the home that most lenders require for a cash-out refinance.

Even if you don’t qualify for a cash-out refinance, a low-cost refinance could still benefit your financial situation. If you end up with lower mortgage payments, you can take the extra cash you now have to pay down your other debts faster.

Options for Decreasing Debt

Whether the cash comes from a refinance or some other source, starving your debt requires a plan:

  • Order your debts from smallest to largest, paying off the smallest one first to get motivated. Next, use the additional money from that pay-off to increase your payments on the next debt. Continue increasing the size of your payments as you pay off debts one by one.
  • Order your debt by interest rate, paying off the debt with the highest interest rate first.
  • Trim your expenses and add every dollar you save to your debt payments.
  • Use every windfall or bonus check or tax refund to pay down your debt.

No matter which of these methods you choose, looking into refinancing your home is one way to increase the available funds for your pay-off plan.

 


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