Would You Consider a Home Refinance to Pay Off Credit Cards?

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.

Another way to move your debt around would be to use a 0% balance transfer credit card.

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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.

Related content:

Pay Off Credit Cards With Home Equity: Secured and Unsecured Debt

Last Edited: February 27, 2011 @ 4:52 pm

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champo

being in the mortgage profession in Vegas- you see plenty of debt consolidation refi's since everyone in town is leveraged. Most think a dc refi is a cureall- but like many have said fail to realize you are amortizing those cc payments over 30 yrs as opposed to 2- plus closing cc accounts is not great for your credit-especially if you are closing all of them.

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Bobin SC

Having been this route before, I agree that if you can't change your spending habits, this is financial suicide. I've saved $100K in my retirement accounts but have incurred about $25K in unsecured debt (now down to about $18K). One way of doing this has been cutting off my retirement plan (and the tax deferred/deduction benefits), which I hate. I'm looking at a year away from being debt free with an emergency fund vs. shuffling the deck and resuming my retirement savings. It's definatly robbing Peter to pay Paul a fortune and risking shooting yourself in the head in the process. For most, a refinance plan better include a lifestyle without credit and ATM cards.

Raff

I think some of you are getting hung up on the differences between secured and unsecured debt -the difference doesnt matter unless you are in bankruptcy. Many states protect your home from creditors and as far as foreclosure - most banks are waiting over a year to foreclose.

If you were in a sub-prime mortgage and can qualify for a better mortgage it makes sense because you'll shave more than a percentage point with the refi and pay off 10-20k of credit card debt without increasing the mortgage payment substantially. Your tax advantage alone will outweigh the 3k you pay in refi costs. You also have to be sure that the charges wont reappear and that prepayment penalties dont apply.

Just be sure to multiply your new payment times the number of payments to get a grip on how much more you are paying in the long run for your refi.

@Kacie - I agree. A nice 0% Intro Interest Rate Credit Card would do the trick.

@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.

Jeremy

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.

Cat

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.

Eden

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.

Hopeforme 5 pts

@Eden Thanks for the info, unfortunately, I wish I had asked this question 3yrs ago. I have the same situation, banks are after me again to refinance. My answer should have been no then and found some other way to pay ccards off. My answer is definately going to be no this time. Your right keep pushing the mortgage payment up until I can't afford it anymore is not the right thing to do. @ Cat Has made very good points too. Thank you...

ChristianPF

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...

Kacie

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.