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It's the holiday season and you've started shopping for gifts for your family and friends (or at least, you've thought about it). This is a time when people spend hundreds, sometimes thousands of dollars on gifts and can end the season with lots of credit card debt left over. But as we go into what has become the "busiest shopping day of the year", the day after Thanksgiving, now is the time to start thinking about how best to pay for those holiday gifts. It's a good idea to consider consolidating your debt. The question is when? If you wait until after you've bought all those gifts, you can refinance your home mortgage to consolidate all that debt. You can turn those multiple high-interest payments into one lower-interest payment. You'll be turning "bad debt" (high-interest credit card debt with non-tax deductible interest) into "good debt" (debt with interest that's tax-deductible). If you want to get the jump on your holiday financing, there are a couple of things you can do: refinance your mortgage and get cash out or get a home equity line of credit. If you refinance, what you're doing is getting a loan for more than what you owe on your original mortgage. Your original mortgage is paid off and you have money left over to spend as you like. For example, if your original mortgage balance is $100,000, you could refinance and get a new loan for $120,000. Your original mortgage is paid off and you have $20,000 in cash left over. The second and generally better option is to get a home equity line of credit before you shop. A home equity line is a second mortgage on top of your original that turns the equity in your home into cash that you can use as you like. The benefits are that second mortgages typically close quicker than a first (sometimes in as little as a week or so); your rate is generally lower than a credit card; and the interest is tax-deductible*. Plus, some lenders offer home equity loans with an interest-only payment option. If you've got credit card debt that you want to pay off and you know you have lots of gifts to buy, you have three options: 1) Use your credit cards and have lots of high-interest debt, 2) Use your credit cards, refinance and get cash out to pay off your credit card debt, or (your best option) 3) Leave your credit cards in your wallet and get a home equity line to get cash to spend for the holidays. Is this what they call a no-brainer? *As always, please consult your tax advisor.
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