Although credit counseling and debt consolidation are on the table of options for your financial situation, cash-out refinancing may be a better debt relief strategy. Much like debt consolidation, cash-out refinancing can help with debt management, but is only available to home owners.

What is cash-out refinancing?

Cash-out refinancing is a way to consolidate in order to better manage debt. It takes your debt payments and combines them into a single payment under the terms of a loan. For example, if you have two credit cards, a few medical bills and a personal loan, all those bills are incurring interest, and it becomes easier to miss one during the month. Cash-out refinancing pays those bills off and leaves you with a single payment per month.

How does cash-out refinancing work?

Usually, your mortgage will have a lower interest rate than your credit cards, and that’s where cash-out refinancing really goes to work for you. You find out how much you need to pay off your debt and then refinance your mortgage for that amount.

For example, if you owe $15,000 in unsecured debt and a $100,000 on your mortgage, you would take “cash out” of the equity in your home to payoff the debt. By rolling the $15,000 debt into a new $115,000 mortgage, you would enjoy one monthly payment and tax benefits. The assumption here is that you have available equity and would qualify for the new mortgage.

You won’t be able to do cash-out refinancing on your own, as it works like any mortgage refinance. As well, there are closing costs, home appraisals and other fees. As with others, carefully review this debt relief option to make sure that it really is the best option for you.

Does cash-out refinancing affect my credit?

Much like any other form of credit, applying for refinancing will cause a hard inquiry on your report, which can drop your credit score a few points. However, if you faithfully pay off the new mortgage, the overall result will be positive.