You may have heard of a potentially confusing term called “cash-out refinance” when searching for ways to get a handle on your debt. And yet the concept is fairly straight-forward: A cash-out refi, as it is also called, is when you replace the mortgage on your home with another mortgage that often includes better terms and rates. When you have equity in your home, you will be able to translate that equity into cash that can be used to pay off other debts. This way, you would pay just one bill – your monthly mortgage – instead of many different bills. Let’s take a closer look at this process:

What Types of Debt Can You Consolidate?

One of the best elements of a cash-out refinance is that you can use the cash for whatever you want. For some people, this may mean spending it all on a new wardrobe or buying a car that they can’t really afford. Of course, that won’t help you get out of debt any faster. However, if you use the cash to pay off high-interest credit cards, end IRS debt, pay medical bills or put an end to that lingering student loan, you may even be able to improve your credit score in the process. A side benefit of this option is that you will no longer have collections representatives calling you or your mailbox filled with letters demanding payments you can’t afford.

Understanding How Much Cash You Can Get

Most lenders will not give you 100 percent of your home equity in cash when you qualify for a cash-out refinance. Most lenders will cap the amount of cash to 85 percent of your equity. So just because your home value has risen $100,000 since you purchased it, that doesn’t mean you can take that entire amount out in cash. Talk with a financial professional to get a realistic idea of how much cash you can expect to receive in this process.

Understand the Costs

When you are deciding to move forward with a cash-out refinance, you’ll have to remember that it’s similar to when you took out your original mortgage. You’ll need to pay closing costs when signing the paperwork. You also want to make sure that your new loan has terms that are favorable to you – experts recommend not refinancing a fixed rate for an adjustable rate, for example. Know how your current interest rate compares to your new interest rate. Problems arise when homeowners don’t ask enough questions, so take your time understanding the process so you can complete it and rid yourself of debt completely.

Get Your Documents Ready

If you’ve decided to move forward with a cash-out refinance, you’ll need to gather paperwork so that you can answer all the questions a refi representative may have. Be sure to save your pay stubs so you can show your proof of income. You’ll need to get your tax returns and W-2s (or 1099s) over the last few years. You’ll also need a statement of debts and a statement of assets and to have your credit report ran by the lender. This will help present an accurate picture of your financial picture so that you can apply to a number of loan agencies in an effort to get the best rate possible.