How this family paid off $46K in debt with a cash-out refinance

Posted: 30 December 2020 12:07 pm

A refinished basement and rising home prices in their area set them up for success.

Our series highlights success stories from real people who’ve managed to dig themselves out from under a lot of debt in a short time. Answers are edited for length and clarity.

  • Name: Rob and Leah Fallon
  • Debt amount: $46,000
  • Type of debt: Home equity line of credit and credit card debt
  • Payoff strategy: Cash-out refinance

What type of debt did you pay off and how much?

After living in our house for five years, we had earned enough equity to qualify for a $46,000 home equity line of credit (HELOC) to refinish our basement. The HELOC came with a 2% fixed interest rate for the first year, and increased to a variable rate of 4% after that.

The first year we drew from our line of credit and spent everything to finish our basement and pay off some debt. At this time, we were only paying the minimum payment due monthly.

After a year our first big payments arrived, and they were high — about $500 a month. With a the variable rate, the idea that our payments could change from month to month without warning made me extremely nervous.

Fortunately, our renovation and the rising home prices in our area allowed us to do a cash-out refinance.

What is a cash-out refinance and how does it work?

A cash-out refinance allowed us to tap into the equity we owned in our home — and withdraw that cash in one lump sum. Once we paid off what we owed on our original mortgage, we were able to get the rest in cash.

What rates and terms did you refinance to?

We refinanced the total amount we still owed on our house to another 30-year term at a 4% interest rate. Our home was assessed for about $55,000 more than it previously had been, so we added that on to our total loan amount.

We were able to take $46,000 to pay off our HELOC and use the remaining $9,000 to finish paying off our credit card debt — and give us a little cushion for savings.

This increased our monthly mortgage payment by $200, but it got rid of the HELOC and credit card payments — so we were actually paying less overall each month on debt repayments.

Closing costs were rolled into the cost of the loan, and we were given a month of reprieve from our mortgage payments — putting even more money in our pockets.

This put us in a great financial position to start saving money and keep us out of credit card debt, without changing our lifestyle all that much.

Any downsides to a cash-out refinance?

I do worry about the long term effect it could have if housing prices tank, or if we have to leave our home suddenly. But for the time being, we have no plans to sell our house, and home prices continue to rise in our area.

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