Homeowners who want to refinance sometimes bump up against two obstacles: first, their home may not be worth as much today, so they lack the equity to refinance. Second, the homeowners may have increased their spending over the years and find themselves with too much debt to qualify for a new loan.
Mortgage lenders want to see homeowners with decreasing debt rather than increasing debt, so consumers should look into the possibility of working with a debt management company and receiving credit counseling. While the goal of becoming debt-free is worthy, the method you choose can have a long-lasting impact.
Debt Management Solutions
First, contact your creditors directly to see if you extend your payments or make alternate arrangements. Work out your own repayment schedule by developing a budget, listing all your debts with interest rates and minimum payments, and then paying them off systematically.
Remember, though, if a creditor agrees to settle a debt for less than the full amount, this will be reported on your credit report and could lower your credit score. The gap between what you owe and what you pay could also be reported as taxable income.
If you want some guidance to help manage your debt, you can meet with a reputable, non-profit credit counselor for budget advice or a repayment schedule. Reputable debt management companies should offer credit counseling along with debt consolidation services. Expect to pay a moderate monthly fee–from $12 to $50–and fees for set up and counseling services.
Beware of debt settlement companies that charge a high upfront fee. The National Foundation for Credit Counseling states that fees over $50 for set up and $25 for monthly services may be excessive.
Cash-Out Refinance
Tightened credit standards have reduced the availability of the cash-out refinance, in which the homeowners take out a larger mortgage than their current loan and pay off other debts with the proceeds. But borrowers with significant equity in their home should see if they qualify for refinancing in order to pay off high-interest debt. The savings can be significant.
Even if you do not qualify today for a mortgage refinance, as you succeed in decreasing debt your ability to qualify for home refinance loans should increase.