Should I Refinance To Pay Off

Credit Card Debt?

Why hocking your house to payoff credit card debt
seldom makes sense.

Questions and answers about using home equity loans to pay credit card debt:

1.   Does it make sense to take out a home equity loan or to refinance your home mortgage to pull out cash to pay off credit card debt?

In general and in most situations my answer would be emphatically no! “Don’t borrow against your house to pay off unsecured debt”. Why hock your house when you can make deals with your creditors and work out your debt. You have absolutely nothing to lose especially if your credit standing is already damaged.

2.   What are the advantages and disadvantages of refinancing your home to pay off credit card and other unsecured debt?

Advantages:

• It takes the pressure off; creditors and bill collectors will stop chasing you.
   

• It lowers monthly payments due to lower interest and longer payment terms.
   

• It may also save you some money since interest paid on a home mortgage is normally tax deductible.

Disadvantages:

• The interest cost will be much greater in the long term.
   

• You exchange unsecured debt (credit card, hospital bills, etc) that you can settle, discharge in bankruptcy and even walk away from if necessary for secured debt that you must pay no matter what or you will lose your house.
   

• If your credit score is poor your effective interest rate may be too high (interest, points & the costs to refinance) for refinancing to be worthwhile.
   

• You may have to give up a low interest mortgage to do a refinancing deal.

3.   Are there any circumstances where borrowing against your house to pay off unsecured debt makes sense?

I don’t normally recommend refinancing a home to pay off unsecured debt. However, there are circumstances where it can be an efficient way to consolidate debt if your credit score is good (not likely for people in this situation) which would enable you to get a very low interest rate.

If I were counseling you, I would steer you toward consolidating using an unsecured debt consolidation loan if it was available to you at a low interest rate or a self established workout arrangement with your creditors.

4.   What should you consider before deciding if refinancing is the way to go?

You must be able to answer yes to the following questions before even considering refinancing as an option to pay off credit card debt:

• Are you financially responsible and in control of your spending habits?
   

• Is your credit good enough to get a competitive interest rate?
   

• Are your sources of income secure so that you don’t put yourself in a position where losing your job means losing your home?

If your answer to any of the three questions is no,
 don’t do it; it will be a big mistake!

Though refinancing can be a quick, easy and almost painless way out of a credit card debt dilemma the price you may have to pay to do it may be much too high.

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