How Do I Reduce Debt With Home Equity Refinance?

Home equity loans and cash-out refinancing are distinct options. A home equity loan, as BankRate explains, is a separate loan--not a refinance--that you take out on top of your mortgage, using your home's equity as collateral. A cash-out refinance involves moving into a brand new mortgage for more than what you owe on your original loan. You can use the excess amount for a myriad of purposes, including debt reduction.


Prepare for an appraisal and inspection of your home. As Freddie Mac notes, cash-out refinances require a new appraisal and inspection. Most lenders use this or a similar process. They do this not only to see how much equity you have in your home, but also to make sure your home is is in good physical condition before approving a new mortgage on it.


Decide how much you want your refinanced loan to be in addition to the amount you owe on your property. Your current credit, income and employment situation will likely dictate how much your lender will let you borrow. If you have $20,000 in credit card debt to pay off, for instance, and $80,000 left to pay on your home, you might ask for a cash-out refinance equal to $100,000. Your lender forwards you the $20,000 to spend as you wish. You will, however, pay back the full $100,000 under the terms you agree to, which include an interest rate and repayment period, generally between 15 and 30 years.


Provide documents and verification that your lender requests. When you transact a cash-out refinance, you are taking out a new loan. Since your credit, income and employment histories and realities could have changed since your original approval, your lender will want to make sure you are worthy of a better rate and the additional cash your home equity provides.


Pay off your debt. As BankRate warns, make sure you are making a financially sound move. Everybody's situation is different, so run the numbers on your own or with a trusted financial adviser. Make sure you aren't tempted to spend the money on a short-term thrill, such as a month-long vacation, that you'll be paying off for 30 years. If you intend to pay down debt, send the check to your credit company right away.