Would You Consider a Home Refinance to Pay Off Credit Cards?
Editor Note: The following is a guest post.
Credit Card Debt
High interest credit card debt cripples people who charge more than they can afford. If we could all pay off our credit cards in full each month, chances are we wouldn’t be using them so often! Making late payments then causes us to pay even more in late fees and sometimes, an across-the-board interest rate increase on all of your credit card accounts.
If you’re a homeowner, you’ve probably considered refinancing the house to pay off your credit card debt to give yourself a new beginning. As with any financial decision, there are advantages and disadvantages to refinancing your mortgage to get out from underneath credit card debt.
Paying off Credit Cards with a Mortgage Refinance: Disadvantages
When you refinance your mortgage to pay off credit card debt, you will more than likely be able to save interest but it isn’t the perfect solution. Refinancing typically requires closing costs, which could be in the $3,000 range. There are some lenders who will help you out by rolling this amount into your mortgage, but you still end up paying for it, and if you choose to pay for it by rolling it into the mortgage, you’re doing that with interest, too.
Paying credit cards with money taken from a mortgage refinance means you are putting your house on the line as collateral. If for any reason you can’t keep up with the mortgage payments now that you’ve included your credit card debt in them; the lender could take your home. If you decide to refinance to pay off credit cards, you should be 100% certain you’ll have no problems repaying it.
Another disadvantage of refinancing your home to get rid of credit card debt can be experienced if you try to sell your home. If you borrow more against your home and then attempt to sell it, it’s more likely that you will not be able to sell the home for the amount you still owe on your mortgage. Just because your house is appraised for a certain amount does not mean you can get that when you put up the for sale sign. If you’re looking to sell your home in the near future, you may not benefit from refinancing the home to pay off credit cards because it could make it difficult to sell the home for more than what you owe; or to even break even with our current economic condition.
Paying off Credit Cards with a Mortgage Refinance: Advantages
Despite the potential disadvantages to refinancing a home to pay off credit cards, there are of course great benefits to doing so. If you are finding it really hard to keep up with all of your bills each month, refinancing consolidates some of those accounts, reduces interest and can sometimes give you a lower payment which will help you considerably. As you are better able to make your payments on time each month under the new arrangements, you’ll also start noticing an increase in your credit score, which will help you over the long term.
Most people find refinancing their mortgage to be a great option if the amount they can obtain from the refinance is enough to completely pay off their credit card debt (and maybe even enough to pay personal or car loans, too). It works like a debt consolidation loan, with the exception that you are securing the debt through your mortgage. Having a single payment each month for each of your various accounts can certainly help your financial situation.
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Do YOU agree? Is a home refinance for credit card payoff a good idea? Let me know in the comments below…
This is a guest post from Debbie Dragon, a writer for CreditorWeb.com; she writes about credit cards, rewards programs, and personal finance.
8 Responses to “Would You Consider a Home Refinance to Pay Off Credit Cards?”
By Kacie on Jul 24, 2008 | Reply
I have no mortgage to do so, and no credit card debt to get rid of…but I wouldn’t suggest anyone “pay off” credit cards by putting it on their mortgage or getting a HELOC.
You’re not really paying them off. The debt is still there, it has just been moved.
I think this would only be a decent idea if a person is committed to paying the balance asap, and is willing to cut up all credit cards.
If the interest rate is so high that you simply can’t get any traction, it would be more reasonable to transfer the balance to something else, but it’s certainly risky, as you’ve pointed out.
By ChristianPF on Jul 24, 2008 | Reply
Yea, I actually have a friend looking at doing this right now… I tried to warn him that even though he could save money by getting a lower interest rate, he will be in big trouble if he continues spending like he has…
By Eden on Jul 24, 2008 | Reply
I would recommend NOT refinancing to pay off credit cards- ever.
I did this myself and still regret it. First of all, if you go into this thinking you are solving your problems, you are fooling yourself. It won’t be long before the credit card debt has piled up again (exactly what I did).
Also, it really isn’t wise to turn unsecured debt into secured debt. If your situation gets worse, you could let credit card payments slide and deal with them later, but if you have now leveraged your house to that debt you could be out of a place to live.
By Cat on Jul 24, 2008 | Reply
NEVER EVER replace unsecured debt with secured debt. To even give this subject a thought is irresponsible. If you are responsible enough to pay down your debt, you shouldn’t need to refinance your home. Also, if you are having trouble making your payments, your credit score is suffering and you would likely not get a great rate on the refinance. Please post a follow-up article explaining secured debt and unsecured debt. You have misled readers today.
By Jeremy on Jul 24, 2008 | Reply
I found it interesting that in the latest issue of Money magazine, they profile a family and tell them to do exactly that! I thought it was outrageous, especially when it said they were funding a 529 plan and already had over $100k in retirement plans. Clearly, they have the ability to save, so if they focused a little more on the debt they could obviously pay it off without needing to secure their unsecured debt with their house, especially in this unpredictable real estate market.
By PT on Jul 24, 2008 | Reply
@Cat - Thanks for your comment, Cat. This was a guest post. Not my opinion. I think my question at the end clearly shows that I’m leading the reader to question this idea. Which you rightfully did. While I don’t think that Debbie’s (guest poster) post was “misleading” as you say, I do think that it doesn’t cover the subject from all angles. HELOC’s, like any financial product, can be used poorly or wisely. I like your idea of a follow-up post. I’m working on it now.
By credit debt consolidation on Jul 30, 2008 | Reply
For people with credit card debt across multiple cards, this option is one that you should be exploring to reduce your payment burden. Credit card debt consolidation is also the fastest way to pay down your principal.