You may or may not know that restructuring debt is a fairly common practice in business. The reason they do it is to save money by paying less interest on their debt. And by saving money on interest costs, they increase profits. Simple, right? But have you ever considered increasing your own “profit” (aka. discretionary income) by restructuring your personal debt? If you’re like most people, the answer is probably no. The reason you’ve probably never considered it is you never realized you could. The question is, how do you go about it?
The answer is by refinancing your home mortgage. Of course, that eliminates some people because they either don’t have their own home yet or, if they do, they don’t have enough equity in that home to make restructuring feasible. But if you do have your own home and you have enough equity, here’s how to use that equity to restructure your consumer debt:
The first step is to determine how much equity you have in your home. To do that, simply subtract the current balance of your mortgage from the current market value of the home. If your home equity is equal to or greater than the total amount of credit card you have, you might be a good candidate for debt restructuring.
How It Works
If you determine that debt restructuring is right for you, the next step is to do a cash out refinance, and use the cash you receive to pay off your credit card and other high interest debt.
Why It Makes Sense
Some people will tell you that using cash out refinancing to pay off consumer debt is just trading one debt for another. That’s true. But there are some very real benefits to restructuring in this way:
- Your mortgage interest is much lower than your credit card interest, so you’re saving money there – a lot of it.
- Your mortgage payment is much lower than the total of your current mortgage payment and your consumer debt payments, so you’re saving money there too – potentially a lot, depending on the loan terms and other variables that are unique to your situation.
- You can use the increased discretionary contribute to your savings and retirement plans every month.
- If your cash out is greater than the amount you need to pay off your consumer debt, you can put that extra cash into a separate savings account designated as your emergency reserve. Having an emergency reserve will keep you from having to use plastic when an unforeseen expense arises.
A Huge Caveat
Of course, as is the case with most good things, there is a caveat to using your cash out refinancing to restructure personal debt. It requires ongoing fiscal discipline to be successful. That means avoiding the credit card trap in the future. If you pay off your credit cards in this way, then run up those balances again, you’ll find yourself in worse financial shape than before. So it’s best to just cut those credit card up (don’t close out the account since it could negatively affect your credit), or at least hide the cards in the freezer or somewhere so that you’re not tempted to use it every time you open your wallet of handbag.
As you consider this option, you should seek qualified professional advice on your specific situation.