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## Should You Refinance Your Mortgage To Consolidate Debt?

Like any financial decision, you’ll want to do your research and consider all your options. When determining if a cash-out mortgage refinance is best for you, ask yourself the following questions.

### Will I Qualify For A Mortgage Refinance?

To qualify for a mortgage refinance, you’ll need to meet the following criteria:

- A credit score above 620 (580 for VA loans)
- At least 20% equity in your home (excepting VA loans)
- A 50% or lower debt-to-income (DTI) ratio
- Enough money to cover the closing costs
- Proof of income

### Do I Have Enough Equity?

Since you’ll be using the equity in your home for a cash-out refinance, you’ll need to have enough to borrow while keeping some equity remaining in the home. This is a requirement of most mortgage lenders.

The amount of equity you leave in your home after you refinance is important because it affects your loan-to-value (LTV) ratio. Your LTV determines whether you need private mortgage insurance, or PMI, which can cost you hundreds on your mortgage payment each month. If your LTV is higher than 80%, your lender may require you to pay this insurance.

Recent changes mean that you also have a hard time taking cash out if you have an LTV higher than 80%. In most cases, only borrowers using a VA cash-out refinance loan will be able to take cash out with LTVs higher than 80%. This is because the VA loan program allows qualified borrowers to use the equity in their homes even if it’s less than 20%. For VA loans specifically, you can cash out all of your existing equity if your credit score is 680 or better. Otherwise, you need to have an LTV no higher than 90%.

To see how a cash-out refinance could affect your LTV, follow the formulas below to calculate your numbers and compare.

To calculate your LTV before refinancing, divide your loan balance by the appraised value of your property. The formula looks like this:

Loan Balance / Appraised Property Value = LTV

Let’s say your home is worth $200,000 and your loan balance is $140,000. Your LTV would be 70%.

Property value = $200,000

Loan balance = $140,000

140,000 / 200,000 = 0.70

To figure out how much your LTV would be with a cash-out refinance, simply add the amount of equity you want to borrow to your current loan balance, then divide that by the appraised value of your property. The formula looks like this:

(Equity Borrowed + Current Loan Balance) / Appraised Property Value = LTV

Using the example above, we’ll add on that $16,000 you would borrow to pay off your credit card debt. Your new loan balance would be $156,000 and your new LTV after your cash-out refinance would be 78%.

Property value = $200,000

Loan balance = $140,000

Cash-out amount borrowed = $16,000

New loan balance – $156,000

156,000 / 200,000 = 0.78

With a 78% LTV, you could do a cash-out refinance with enough equity leftover to avoid PMI.

Use this formula to calculate what your LTV would be after a refinance. If it’s higher than 80%, you may want to seriously consider whether taking out that equity would give you enough money to accomplish your goals.