Debt.Consolidation

How and why to consolidate debt
There's a lot of talk these days about debt consolidation. And, no wonder. When mortgage interest rates are low, it's a great time to use the equity in your home to pay off higher-interest debt like credit cards and car loans and instead make only one low monthly payment. You'll not only free-up cash flow but it's very likely that the interest will be tax-deductible.

Here are the two most common ways for using the equity in your home to consolidate debt.

cash-out refinance - for when you have equity
A cash-out refinance is the best option if you have a lot of equity in your home and your current mortgage interest rate is higher than the rate being offered today. With a cash-out refinance you'll pay off your current mortgage and get cash back to pay off credit cards and other loans. While it's true that your new loan amount will be more than what you owed on your old mortgage, you'll use the cash to pay off other debt. You'll still have the same amount of debt; but now it's "consolidated" at a lower interest rate and with interest that's most likely tax deductible*. (Typically, credit card and other loans interest is not tax deductible.)

home equity loan - for when you have equity and a low rate
So, what if you've got a lot of equity in your home, but your current interest rate is lower than the rate being offered today? That's when you consider a home equity loan. A home equity loan is an additional loan that borrows against the equity in your home. So, let's say you have $50,000 equity in your home and you'd like to pay off $15,000 in high interest credit card and other debt. You take out a $15,000 home equity loan. And, while home equity loans usually have higher interest rates than cash-out refinances, chances are the interest rate is much lower than the debt you're paying off.

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