Using Real Estate to Take Control of Your Debt

Written by Posted On Wednesday, 08 May 2019 13:00
mortgage debt mortgage debt

When you have unsecured debt such as credit card balances, personal loans, business debts or even debt from medical bills, there are numerous ways you can relieve yourself from your debt such as debt consolidation, debt negotiation, debt settlement and other debt relief programs. You may be at the point in your life that paying off your debt seem like an impossibility and you may be considering all possible solutions to your woes. If you own a property, you may be considering of using this asset to reduce your balance or pay off your debt for good. However, it may or may not be a good decision depending on your financial situation.

Consider the following ways you can use your real estate property to take control of your debt:

Selling Your Home to Pay Down Debt

You might be thinking of selling the property that you own, taking the proceeds from the sale and paying off your huge debt to end it once and for all. It might sound like a good solution at first if you have no other option. However, it's a risky move especially when the circumstances aren't favorable for you.

For this to work, your home must have enough equity. Let's say you owe a total of $140,000 and your home is worth $200,000. You may be expecting to still have $60,000 profit from selling your home. Sounds good right? Consider this: while this might be feasible for some, once you sell your home, you are at the mercy of the rental market. Rental price are skyrocketing especially in large urban cities. Factor in the expense in selling your property like the fees associated with your real estate agent, closing cost and real estate sales tax, if applicable. Especially if you are paying a smaller amount of debt, the expense to sell your house might even be more than your $25,000 credit card debt. There can even be fix-up costs to get your house ready to sell on the market or may be required after inspection.

Downsizing Your Home

If you have a smaller yet still unsurmountable debt at your current cash flow like credit card debt, medical bills and you own a property, downsizing your home can be a good choice to consider.

To downsize would mean that you trade your current home to a less expensive one. Like for example, switching to a condo, townhouse or a home that's not necessarily smaller but at a lower cost than your selling point. This is applicable only if your debt is at a smaller amount. You have ample money left from your sale to purchase a new one and even pocket the difference if there's any left.

Also consider that downsizing would also need a lifestyle adjustment. Compromises need to be considered to live more economically and efficiently.

Your Debt-to-Income Ratio Matters

How about if after paying your debt, the difference is not enough to buy a new house yet still enough to cover a downpayment on a new home? Financing is plausible given that your debt-to-income ratio does not exceed 43% which is the basis for most lenders. If you exceed 43%, you likely will not be approved for a mortgage.

It's either you start making more money or lower your monthly recurring debt in order to get yourself approved for a home loan.


Refinancing Your Existing Mortgage

Another option if you want to take advantage of real estate in paying off your debt is to refinance your existing mortgage at a lower rate to reduce your monthly recurring payment. While this choice might free up some cash, it can also extend the length of your repayment schedule. It is also worth mentioning that it costs money to refinance. Expenses such as origination fees, closing costs, surveys and appraisals... all these are upfront expenses you should give allocation to.

Rolling Credit Card Debt into Mortgage

If you have sufficient equity in your property, you can take out a new, larger mortgage to pay off your old one while leaving you excess cash to pay off your debt. This is commonly known as cash-out refinancing. This new home equity loan is considered a second loan with its own loan terms. You must have a good credit standing on your old mortgage, a healthy credit history and good amount of equity for this option to be favorable.

If your property is valued at $320,000 and you owe $240,000 on your mortgage, you essentially can refinance your current mortgage and take off the excess to pay other debts. It's debt consolidation, technically speaking. You are paying off current credit card or any unsecured debt -cutting the number of creditors - and rolling them into your home mortgage debt.

The advantages of this method is being able to simply monthly payments and being able to sort of save a little off your interest since credit cards have higher interest rated than mortgage.

Secured Vs. Unsecured Debt

Credit card debt is unsecured debt. This means there is no collateral attached to the debt no matter how big. Your credit score will definitely fall and you will receive calls from collections but they cannot take any of your possessions when it comes to credit card debt. Unlike a car loan, when you default, the lender can repossess the car to recover any financial loss they incurred from non-payment. The same is true for home loans. Since the house itself is your collateral, they can take it anytime you default on your payments.

This is the risk of rolling your credit card debt or other unsecured debt into your mortgage loan. Instead of having multiple debt which you can choose which one to pay first should there be any emergency or unexpected financial crisis, your unsecured debt has turned into a secured loan. Miss your mortgage payments and you can eventually lose your house! You have to be absolutely sure you can afford your increased mortgage payment when going on this path. If you are not struggling to make your current payments on your current debt, the risks may be nominal. However, if you are missing payments or even if your new refinanced amount is about the same, consider the length of your payment term. Extending your term will mean extending your obligations. Consider your long term goals or if you are still able to pay the amount in 15 to 20 years factoring in your retirement plans.


Points to Consider

Your current credit standing matters to your lender at the moment. Make sure you meet the parameters before considering any of the options above.

Look beyond the current value of your property. Will real estate likely to improve or fall in your area? Will there be considerable benefits if you wait until the next year or is it more advantageous to act right away?

Keep your choices in line with your long term goals. The current goal is to pay off debt at the moment. Will you be able to sustain your new consolidated payment in the next 5 or 10 years? Will you likely shift careers or retire soon? Take into consideration any foreseeable expense or decisions you might be having.

Lastly, consider making a lifestyle check. If you are considering any of the above because of overspending and failing to stick to your budget? Consider seeking counseling to stop you from eventually ending back in the same financial crisis. A good support group or sound advice from a professional could be what you need to help you overcome your debt problems.


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Dianne S

CuraDebt  Debt Relief is one of the leading and most trusted debt relief companies in the USA today. Started in 2000, it is one of the oldest and most experienced in the debt relief industry. Its in-house, no upfront fees debt relief program has helped thousands of individuals, families and small buisnesses resolve their debt problems for good.

CuraDebt can help determine if debt settlement, debt management or debt consolidation is right for you according to your unique financial situation through a completely confidential free consultation by visiting their website or calling 877-850-3328.

CuraDebt is here to give tips and timely advice on real estate problems and questions related to the debt industry such as mortgage and home loans.

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