Should I pay off my credit cards by refinancing?

Refinancing a mortgage is one way to pay off credit card debt however there many advantages and disadvantages which need to be carefully weighed before deciding if this is the right decision. Probably the most important is your ability to change future spending habits for any financial adjustments to be effective.

Credit card debt is a concern for many households and makes the desire to refinance a common one. The average household’s credit card debt in the United States is $9,000. Credit card debt is associated with high interest rates and penalty fees that many find financially crippling.

What is mortgage refinancing?

Refinancing a mortgage is actually like taking out a new mortgage. The old mortgage’s terms and payments are paid by the new mortgage and typically include all of the original fees associated with closing a mortgage, such as:

  • Appraisal costs
  • Processing fees
  • Underwriting fees
  • Title fees
  • Escrow fees

Because a homeowner is essentially paying off the old mortgage and taking out a new mortgage, one new fee could be a prepayment penalty. Prepayment penalties are around 80% of six months’ worth of payments. Not all mortgages have a prepayment penalty fee, but it can be a very large amount if a mortgage assesses such a fee. There are also no-cost refinancing offers available, but the terms of any refinance must be understood before committing.

What types of mortgage refinancing are available to consolidate credit card debt?

There are different ways to refinance a mortgage to pay off credit card debt. Some people use mortgage refinancing tools such as:

Refinance to a lower rate

This can be done through going from an adjustable rate mortgage to a fixed term mortgage or refinancing to a mortgage with a lower rate. This may leave a homeowner with a lower mortgage payment every month; that extra money can be used to pay down credit card debt over time.

Extend the term of the loan

Extending the number of years that a homeowner has to pay off a mortgage will result in lower payments; again, that additional money can be used each month to pay off credit card debt.

Cash out home equity to consolidate debt

A homeowner can take out a larger loan than the cost of the house. The additional amount can be used to pay off credit card debt in one large payment.

What are the advantages of mortgage refinancing to pay off debt?

Credit cards can have high interest rates that only increase debt at an alarming rate with some credit card rates exceeding over 30%. Home mortgage interest rates are generally under 6% and consolidating credit card debt into a home loan can have substantial savings. Mortgage interest can also be usually claimed on income taxes as a deduction whereas credit card interest cannot.

What are the disadvantages of refinancing?

For starters, the credit card debt is essentially added to the end of a home loan. The home then becomes collateral when it is used to pay off debt; if a homeowner is unable to make the payments, then the homeowner runs the risk of losing the home. Refinancing also usually extends the length of a loan and has high closing costs. If those habits that led to high credit card debt are not changed, then mortgage refinancing to pay off credit card debt will not be a sound financial decision.

When is refinancing a good decision?

Refinancing is a good choice if high credit card debt is creating financial difficulties for a homeowner. If refinancing will save substantial money in the long run, then it is most likely a good financial move. It is a decision that should be made with a full understanding of all of the terms, fees, and rates involved.

When is refinancing a bad decision?

There are a few instances when refinancing is not a good financial decision. Firstly, it is not a good choice if a homeowner has been paying on a home loan for over ten years. Then, the homeowner has paid off most of the interest on the home and is mainly paying the balance of the actual loan; refinancing brings all of that interest back into the mortgage payments.

Secondly, refinancing is not a good idea if it will not save money in the long run. If the new interest rate is not low enough or the credit card debt is not high enough, the high fees associated with refinancing might erase any savings from paying off credit card debt.

What are other options for paying off credit card debt?

There are other options using a home’s equity rather than refinancing that can be used to pay off credit card debt. Each option has its own advantages and disadvantages that must be carefully weighed.

Getting a second mortgage (such as a home equity loan or home equity loan) is one way to get cash to pay off debt without touching your first mortgage. Interest rates for home equity products are still far lower than credit card rates.

Before refinancing make sure you have a sound understanding of the loan terms and a commitment to spending money wisely future, otherwise you will just end up trying to refinance again in a few years.

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