dcsimg

Should I refinance to pay off credit card debt?

Posted by  on May 21, 2014
 

Q: With mortgage rates slipping back down again, I think I'm going to have a chance to refinance. I have $50,000 of equity in my home, and I'm wondering why I wouldn't borrow as much as I can against that in a cash-out refinance, pay off credit card debt but also use the remainder as a cheaper source of credit than future credit card debt. What's the downside?

A: What you are suggesting could be a money-saving strategy, but it could also backfire. It all depends on how you control it.

The potential to save money by refinancing to pay off credit card debt is clear -- mortgage rates are around 4.3 percent these days, while the typical credit card balance will cost you around 13 percent. So, a cash-out refinance to pay off credit card debt could save you around 9 percent in interest -- perhaps even more, if you have a higher credit card rate.

So how could this backfire?

Well, there are three potential problems:

  1. Trading a long-term asset like equity in your home for short-term spending is not a sustainable strategy. If this strategy simply enables you to take on more debt, you will just be digging yourself a deeper hole.
  2. Taking on a new mortgage could be more expensive in the long run, if it means owing money for a longer period of time.
  3. Taking on a new mortgage could put your house at risk if you encounter a financial setback that makes it difficult to pay back the loan.

The key to whether or not this will work for you is the budget you put in place after you refinance. You need to make sure you are living within your means and paying down debt, because you will no longer have that home equity to fall back on. Debt should always be thought of as temporary, so you should only borrow if you have a specific plan to pay it off.



Looking For The Best Mortgage Rates?


Start right here...

X

Get Mortgage Rates by Email

  • Compare mortgage rates offline
  • Get updated rates in your inbox
  • Apply for a mortgage from your email
  • We don't spam

Get Your Rates Emailed Now!

Subscribe To Lending Lowdown
Your information will never be shared
Shoprate User Survey