If you have a bunch of high interest debt but have equity in your house, you might be able to create a do-it-yourself debt consolidation loan to refinance. Refinancing your house is a process of getting a new mortgage to replace the old one. If your house is worth substantially more than what you all on it, you may be able to get the second mortgage for significantly more than the first mortgage is paying off.

Let’s say you own $100,000 on your house. If your house is worth $150,000, you could reasonably expect to get a loan for $120,000 to pay off the $100,000 mortgage. This would leave you with $20,000 in cash. Assuming your mortgage rate is 5% or 6%, $20,000 to pay off credit card debt at 29% might be a very wise financial move.

However, if you have substantial credit card debt you may have a difficult time qualifying for refinancing the first place. Still, it might not be a bad avenue to explore given the potential gains.

Mortgage insurance

When looking at a refinance you must consider mortgage insurance or PMI. mortgage insurance is an additional fee you pay on top of your mortgage payment that allows the bank to buy insurance in case you default. Mortgage insurance is usually only required when the bank feels a default would leave them in a poor financial situation with regards to the value of your house. So if the amount you owe on your house is close to its value, the bank will require mortgage insurance. That way if you stop paying and destroyed the house when they evict you, they are protected from a loss due to a lower selling price.

Normally mortgage insurance is required when you have less than 20% equity in your home. This means if you buy a home for $100,000, borrowing any more than $80,000 will result in a need to pay mortgage insurance.

The mortgage insurance requirement may negate any benefit of consolidating high interest debt into your mortgage.

Refinance process

The refinance process is very similar to the process of getting a mortgage in the first place. It requires an appraisal, a credit check and approval by underwriting. Since the recent financial debacle there are a host of new rules related to refinancing. In general they are designed to prevent people from borrowing more against the house than it is actually worth.

For example, you must own your house for at least six months before doing a refinance that involves taking cash out or valuing your house at a price higher than the original appraisal or the price you paid (whichever is lower). If you paid cash for your house, the waiting period is 12 months.

Another recent change is the need for multiple appraisals. If the appraisal for refinance shows that the value of the house has increased more than 10% of the original price, a secondary appraisal is usually required. This is done to lower the bank’s risk that an individual appraisal might come in higher than the actual value of the house.

Qualifying for refinance

As mentioned before, if you have substantial credit card debt you may find it difficult to qualify for refinancing the first place. Banks will look at the amount of your monthly payment on your credit card and subtract that from the amount that they say you could afford to pay on your mortgage. Your credit report will also be impacted by the ratio of credit card debt to possible credit card debt. For example, if your credit card has a $10,000 limit and you owed $9500 this would probably hurt your credit rating. If you had a $100,000 limit, it is likely to make very little impact.

Final thoughts on refinance consolidation

Debt consolidation through refinancing your mortgage can be very useful strategy to lower the amount of money you pay in interest on credit card and other expensive debt. It may not work for everyone, but is worth checking into particularly because interest rates are so low on mortgages right now.

A word of caution. All mortgages are not equal. Some require significant expense in the form of closing fees. Make sure you understand the entire cost of a mortgage before attempting a refinance.

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The $8,000 housing credit has been extended for 2010. There are also some new credits available to people moving–even if they have already owned a home.

Given the number of homes on the market–particularly the number under foreclosure–this can be a great time to get a very good deal. Lenders are much more careful, so if you buy a house that requires some fix up, you won’t be able to take cash out at closing as you could before. Still if you have some cash on hand, buying at house that needs some tender loving care can be a great deal because many potential buyers can’t buy it and have enough money left over to do necessary repairs.

You can’t borrow against your IRA, but you can take out a certain amount to pay for your first home. The government lets you take out up to $10,000 to buy your first home. This money is taxed when you take it out (just like it would be when you retire), but there is no 10% penalty.

Combining this with the $8,000 stimulus credit that runs through November 2009, this can give you $18,000 to work with. The downside is that your IRA is probably worth less now than it was when you put the money in, so you may have to take a loss to take the money out.

Still if you find the right house, it could be a useful means of getting some extra cash together.

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Congress recently passed a law that offers assistance for individuals and families who are facing forclosure. It is designed to help people who are in trouble due to subprime lending. There are many facets to the law, but the biggest help is a provision that allows some individuals to refinance their house for 90% of the original value.

This has to be worked out with the lender, but it gives some homeowners a break on their payments without totally ruining the lenders who made the loans. The government is also raising the limits on how much they will loan home owners to help some people shift loans over to the government.

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• Short Sale vs. Short Payoff: What’s the Difference?-Diane’s Job
  Because short sales are becoming more common in our economy today, it is important to know how           they work and what the processes are that are involved when a short sale is conducted. This article explains what goes on in a short sale and who ultimately is responsible for the loss of funds that results from the short sale.

• What is a Short Sale?-Barker and Hedges Real Estate
  At times, it becomes impossible to keep up with mortgage payments for various reasons and incidents in life. To save what credibility with lenders that is possible, short sales are sometimes allowed. In these sales, the lender agrees to be responsible for the funds that are outstanding after the sale of the property in question. This article provides some helpful tips on how a short sale works.
• Ten Things to Expect on Your Way to a Short Sale-Mark Shandrow
  When conducting a short sale, a few homeowners may not know exactly what to expect when the proceedings begin. The author of this article gives 10 points of interest for those who might be participating in a short sale in the future.
• Understanding Short Sale for Your Home-My Blog
  The processes and goings-on behind the short sale of a home can be slightly confusing. For a homeowner or prospective buyer, it is important to realize what is going on at each stage of the procedure. This article would help anyone that is seeking to better his or her knowledge of the subject.
• Short Sales 101 for the Homeowner-Kirsten Means
  If a person’s home is heavily mortgaged and there seems to be no way out but to declare bankruptcy, there really are a few options besides that. One of these options is a short sale. Not all lenders will accept this type of a proposition and the laws concerning short sales are different for each state. However, a short sale could preserve a person’s credit more so than declaring bankruptcy. This article explains exactly what a short sale is and how it works.

The WSJ had an interesting article that talked about a scam people were using to keep a house when they couldn’t make payments on their current home. Lets say Nancy lives in a neighborhood where she paid $400,000 for a house. The value of her house has dropped to about $200,000. Her adjustable rate mortgage is about to jump up a notch and she will no longer be able to afford the payments. Nancy still has a job, but she can’t afford to pay an extra $1000 per month (or more) after the rates go up.

Many other homes in Nancy’s neighborhood are going up for sale as well. Some of the homes are even identical to hers and are going for half of what she owes.

Before her credit is ruined, Nancy goes out and buys another house–maybe even one just like the one she owns. Then she simply stops making payments on the first house. Eventually the bank forecloses on the first home and Nancy keeps the second house down the street.

This is what people are trying to do. Right now there are some people getting away with it, but it looks like it will normally be considered fraud. It is too early to tell exactly what the courts will decide, but people in serious trouble will take drastic measures–sometimes without regard for the consequences.

As home values go down, many people are seeing why consolidating consumer loans into a home equity loan is a bad idea. Lets say you bought a $5,000 television system on your credit card and later consolidated that debt into a loan backed by your $150,000 home. As the market has dropped, your home may only be able to sell for $120,000 now. So if you originally owed $150,000 on your home, you know owe $155,000.

If your job moves and you need to sell your house, you will have to take a loss of $35,000. Unless you have a way to come up with that money, you can’t sell your home. When you go to closing, the paperwork can’t be completed unless everyone gets paid what they are owed. Since there is a $35,000 difference between what you owe and what the buyers will pay, you have to make up the shortfall. There aren’t a lot of options available to you. Your television is probably worth considerably less, so selling it isn’t an option–or at least isn’t an option that is likely to give you any reasonable amount of equity.

As you can see it is best to not owe money on things that depreciate. Homes can go down in value. In the long run they will probably appreciated, but don’t stake your financial future on an assumption that your home will appreciate over a short period of time.

The baby boom generation is marching towards retirement with two distinct traits: 1) a vast wealth of home equity thanks to the boom in real estate that has slowed only recently and, 2) a heavier debt load than any prior generation of retirees. Together these factors seem a good match for taking on a reverse mortgage to consolidate debt.

Reverse mortgages are financial tools geared toward senior citizen homeowners that allow them to turn the equity in their homes into cash without having to worry about monthly loan payments. Instead, payoff of the loan and accrued interest are deferred until the homeowner dies, sells or moves out. Moreover, no matter how large the loan balance grows, the homeowner (or estate) never owes more than the market value of the home.

So, it seems like an ideal combination: seniors can consolidate and pay of their credit card debts with home equity and not have to worry about monthly payments.

But there is a downside. Reverse mortgages carry steep upfront closing costs for things like appraisals, mortgage insurance, and lender’s fees. The key to a successful reverse mortgage transaction is to have the loan outstanding for a long time (seven years or more) to amortize these costs. If the loan is paid off within a few years, the true cost (APR) of borrowing can be very high. However, a recent study published by HUD indicates that most reverse mortgage loans terminate within seven years.

Reverse mortgages can be useful tools for debt consolidation, but borrowers must be cautious and must educate themselves thoroughly about the pros and cons of reverse mortgages.

When interest rates are low it is popular to refinance your house. This can result in tremendous savings over the years that you own your home. For example consider a loan at 7 percent interest. Over 30 years you’ll pay over $130,000 just in interest. On top of that you’ll pay back the principle and pay for PMI and other fees. If the interest rate is 6% you’ll pay nearly $20,000 less in interest. Not bad for a 1% change.

Refinancing does have a charge associated it. Generally it will cost a couple thousand dollars to refinance. If you plan to be in your house for a long period of time, it may be well worth it. However if you plan to move in a few years, you’ll need to make sure that the refinancing fees are less than what you’ll save in interest.

Another potential for savings is to remove PMI payments. PMI is payment for insurance in case you default on your loan. Once you own 20% of the equity in your house, PMI should go away. When you refinance, it may be possible to have your house re-appraised. If your house has appreciated, you may be able to do away with mortgage insurance way before you’d be able to based on paying off the principle alone. For example, if your house value is worth 100,000, you paid $90,000 for the house, and you’ve made payments on the principle of $10,000, you know own 20% of the equity in your house. When you refinance you should be able to use this to get a loan without the need for PMI.