Should You Refinance Your Home to Pay Off Credit Card Debt?
When homeowner's find themselves buried under their credit card debt, many consider refinancing their home to pay them off. There are advantages and disadvantages to refinancing your mortgage to pay off credit card debt. There are also other options that may suit your financial situation better.
Advantages of Refinancing Your Mortgage to Pay Credit Card Debt
If you are finding it impossible to keep up with all of your monthly expenses, refinancing the mortgage to pay off credit card debt can give you some breathing room. Basically, the credit cards you pay off will become secured debt that is paid over a period of 15 to 30 years (depending on your mortgage terms). The amount you pay each month will be more affordable, and you will probably improve your credit score with on time payments on the refinanced mortgage.
Refinancing is a good option if the amount of money you can obtain through the finance is enough to completely pay off your credit card debts (and perhaps any personal loans or car loans) to give yourself a single monthly payment for all of your debt. It's much like a debt consolidation loan, except it's secured through the mortgage.
Disadvantages of Refinancing Your Mortgage to Pay Credit Card Debt
Refinancing your mortgage isn't a perfect solution. Usually it requires paying closing costs of about ,000. Sometimes the lender will roll this amount onto the back of your mortgage, but you still end up paying for it.
Another disadvantage of paying your credit cards with a mortgage refinance is the fact that you are using your house as collateral. If you are unable to keep up with the payments, the lender can take the house back, so it's important that you're sure you can make the payments once you refinance.
In tough economic times, refinancing your house means you are at risk for not being able to get what you owe for the home should you decide to sell it, or only breaking even. Just because the home is appraised for ,000 doesn't mean you can automatically get that amount when you put a for sale sign on the front lawn. If you are considering a mortgage refinance in order to pay off credit card debt, you will want to carefully consider how that will affect you if you choose to sell the home within the next few years. Will you be able to sell the home for more than what you owe?
Using Home Equity Loans or Home Equity Line of Credits to Pay Credit Card Debt
An alternative option for homeowner's looking to pay off credit card debt and other unsecured debt is to obtain a home equity loan or home equity line of credit. The closing costs for a home equity loan or line of credit are much lower than the closing costs on a refinance, and you get to keep your current mortgage interest rate. The home equity loan or line of credit interest rate will be higher than the mortgage in most cases, but it will be substantially lower than the interest you are currently paying on the credit cards.
If you have an emergency fund saved, you probably would want to consider a home equity loan. You apply for a specific amount of money that will be used to pay off your debt; and then you'll make monthly payments on the home equity loan at a fixed interest rate. If something goes wrong, or you need to make unexpected repairs on the car or your home, you can dip into your emergency savings and avoid charging more on your credit cards.
On the other hand, if you don't already have an emergency fund established, you might consider the home equity line of credit instead of the loan. A line of credit secured by your home works much like a credit card. You can withdraw money as needed, usually via checks, and make monthly payments on the amount you borrow. A home equity line of credit is usually at variable interest rates, but you have access to the money as needed. Once you use the line of credit to pay off your debts, if you find your car needs repairs and you have not been able to save the money yet, you have access to the home equity line of credit, which will offer you a better rate than using credit cards.
Debbie Dragon is a writer for CreditorWeb.com, where she writes about credit cards, rewards programs and personal finance.