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Finance

Refinancing Your Mortgage to Pay Down Business Debt, Does It Work?

Mortgage to Pay Down Business Debt

Are you financing a business debt giving you sleepless nights? Maybe your business was working well four years back, and you decided to take a business loan, only for the things to turn out unexpectedly. With the current high-interest rates on a business loan, you may find it hard to pay off the debt. Luckily, you have built up enough equity on your home, and you feel it is right to refinance the mortgage and pay a business debt. The question is, is it a good idea?

While you may receive professional help from Loan Advisor, you have to be smart enough to succeed in refinancing. Ideally, you are not alone because almost every business owner has debts, such as credit card balances. Paying off the debts sounds challenging, especially with the current Covid-19 pandemic. Therefore, the majority of them will decide to use their mortgages to settle business debts. Before using a refinanced mortgage to pay off your business loan, you need to understand how it works. Refinancing your home means replacing the current mortgage with a new one. Mostly, you refinance to get a lower interest rate and monthly payment. As your home appreciates over time and the loan’s principal amount goes down, refinancing allows you to tap into some of the equity built. Secondly, debts are not the same in interest rates.

Mortgage rates tend to be much lower than business loans. Therefore, consolidating your mortgage to pay off a business loan means you can deduct the overall interest to up to $1 million depending on your filing tax and the period you have stayed in your home. With the mortgage rate being lower and tax-deductible, refinancing your home to pay off other debts sounds like an attractive idea. However, the biggest worry is if the strategy works for everyone. To know if the concept will work on your side, look at the following areas;

Home Equity

The first thing that determines how much you will make when you refinance your mortgage is the amount of equity your home has built. Before refinancing your home to pay off any debt, ensure that you have enough equity. For instance, if you find yourself owing 80% of the home’s value after refinancing, you may be forced to buy mortgage insurance. To have a picture ofhow much equity you have built, you can calculate your loan-to-value ratio by dividing your mortgage balance with the approximate home value. In case you are refinancing to pay off a debt, you will have to add the debt amount to

the mortgage balance and divide it by the approximate home value as follows; Current mortgage balance plus debt balance to pay off divided by approximate home value. If the resulting loan-to-value ratio is less than 80%, it means you can cash out enough equity to pay off a businessdebt.

Closing Costs

Closing costs come with hidden charges that may exceed a down payment, and they should be considered keenly before refinancing your home to pay off debts. When refinancing your home, it is wise to remember that lenders and service providers charge thousands of dollars on closing costs that you can use to pay off your debts. Therefore, you need to compare the closing costs and the overall interest saving on the consolidated debt. If the closing costs are higher than interest saved, there is no sense in refinancing your mortgage. However, it will make sense if the closing costs are lower than the interest saved on the consolidated debt.

Is It A Good Idea Refinancing Your Mortgage?

Once you have measured the above factors, you may decide to refinance your mortgage and pay off a business loan. However, there are still some worries if it is the best approach. Therefore, if you ask a financial advisor or a real estate expert about the idea of using your mortgage in paying down your debt, no one will give you a direct answer without revealing the following secrets;

You Are Converting Unsecured Debt to Secured Debt

Before refinancing your mortgage to pay off any debt, remember that you are likely to put your home on the line. At the moment, your business debt can be unsecured, meaning creditors cannot easily take your property if you fail to repay the debt. Of course, it is one of the reasons creditors charge high-interest rates. Once you transfer this debt to your mortgage or home equity, you will be putting your home in line. This is likely to increase your monthly payments, although with a lower interest rate. Additionally, if you fail to pay with the agreement’s terms, the lender can foreclose on your home.

Refinancing Costs Money

If you think refinancing is a cheap idea, then you are wrong. Even with the latest lowest rates experienced, refinancing your mortgage to pay off a business debt will always incur additional costs. You still need to pay for appraisal and inspection fees. Later, you will need to pay loan origination fees and closing costs. Therefore, refinancing a home typically depends on your credit score, the lender, and your mortgage’s value. Although cash-out refinancing is likely to give you extra cash to pay off debts, you may incur additional costs exceeding the interest saved on the consolidated debt.

It Affects You Credit Score

Taking a new mortgage before paying off the original one affects your credit score negatively. For example, when you sign up for a new mortgage to pay off, a business debt shortens your credit account’s average life, which damages the credit score. You may not realize the impact because you will not have higher balances on your credit card. However, lenders will be nervous about the larger mortgage showing up on your credit report, depending on your monthly income. Therefore, refinancing your mortgage to pay off debts is likely to deny your chances to get higher loans due to a low credit score.

Final Words

The decision of whether to refinance your mortgageto pay off business debt or not is entirely situational. Suppose your home meets all the requirements for a refinance without exceeding 80% of the loan-to-value ratio. In that case, it is a wise idea to use it in paying off your business debt. However, before settling for this option, you need to check with both parties to ensure you do not fall into deeper debts. As far as refinancing sounds an attractive idea, sometimes it can work against you if not well calculated.

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