Having credit card debt is just a way of life for most people in America. However, there may come a time when those people are ready to be free of the burden. People with credit card debt that own a home or have equity in their financed home often look to their home equity for a way out. This can be a great tool, but sometimes a refi leads to a higher monthly payment.
Why Would Someone Choose to Use Home Equity to Pay off Credit Card Debt?
On paper, it may seem obvious that having a loan with a much lower interest rate (mortgage) is better than one with a much higher interest rate (credit cards). People may consider this option because:
- Credit cards often carry an interest rate 3 to 4 times higher than that of a mortgage.
- Credit cards carry the stigma of “bad” debt.
- Loan consolidation is often thought of as a good thing.
When Using a Home Refi to Handle Credit Card Debt Is a Bad Idea
Some experts say it is always a bad idea. When you utilize a cash out refinance loan to pay off credit card debt, you convert unsecured debt (credit cards) to secured debt (mortgage/home equity loan). Secured debt is linked to an asset. If payments are missed and the bank decides to foreclose, they can take the home as collateral and sell it to offset debt. Because it is unsecured, credit card debt can be forgiven or settled using a tool such as bankruptcy.
When Refinancing Your Home to Pay off Credit Card Debt Is a Good Idea
For a home refi to be a good choice, there are considerations:
- The “rule of thumb” when considering a home refi to offset any debt is to avoid it if the resulting refinanced loan value equals more than 80% of the value of the home.
- If the resulting monthly loan payment is lower than the sum of the mortgage payment and credit card payment each month.
If you are feeling overwhelmed with debt or you are behind on payments, a debt restructuring could be the answer. Before you make a decision regarding a home refinance, contact Elias Dsouza to discuss, bankruptcy, debt settlement, credit counseling, and much more. Elias has been assisting people with credit card debt for over 15 years.