Refinance — debt consolidation or cash out?

“Barry” asks:
I need to refi my home because of divorce. The home is appraised at $255K, and the current payoff is $120K. I also have substantial credit card debt that I want to pay off (~$14K). My question is what is the effect of using your “Refi - Debt Consolidation” vs. the “Refi - Cash Out”? Thanks for your help and for this superb site.

Thanks for the question and compliment!

When you choose a refinance for debt consolidation, the lender will usually take into account the debt you want to pay off when qualifying you (ignoring the debt you are paying off in your qualifying ratios) and actually write the checks to your lenders to pay off that debt.

When it comes to cash out, you are not specifying what you are using that cash for, and lenders may limit the amount of cash out permitted.

In your case, your LTV (loan to value — or amount of loan compared to the value of the home) is so low, you shouldn’t have any trouble consolidating your credit card debt. Choose a Refinance Debt Consolidation, then talk with the lender you are matched with if you also want to take some additional money out to refinance.

A couple of other things — make sure you continue to make at least your minimum payments on your debts until the funds from your closing have been credited to your credit card accounts. I’ve seen consumers hold off on making payments, and then find late marks on their credit when the payments from the loan proceeds didn’t make it to creditors on time.

Also, it is a good idea to monitor your credit reports and scores for a while during and after your divorce, since that’s when a significant number of credit report mistakes and problems occur.