Low mortgage rates are providing homeowners with unprecedented opportunities for affordable refinancing. Although most mortgage refinance transactions simply reduce the mortgage rate, you may also wish to consider cash-out refinancing for consolidating high cost consumer debt. Refinancing involves paying closing costs, so refinancing strictly for debt consolidation may not produce intended savings.
Refinancing your home loan to a lower mortgage rate and paying off higher-interest debt could free up a lot of cash. To really cut your interest expense, use that savings to pay off your mortgage faster, and don't incur credit card debt than you can't pay off each billing cycle.
- Converting credit card debt to mortgage debt may provide tax benefits: Consult your tax accountant or financial advisor to see if refinancing for debt consolidation can increase your mortgage interest deduction. If you itemize deductions, refinancing for debt consolidation may add to deductible mortgage interest paid.
- Streamline debt management: Rolling multiple bills into your home loan converts several bills and your mortgage into a single payment.
- Improve cash flow: Lower mortgage rates and debt consolidation may improve your monthly cash flow by lowering the total amount you currently pay. Using free online mortgage calculators can help you estimate how much less you'll pay each month.
Consider potential risks when deciding if refinancing for debt consolidation is right for your situation.
- Foreclosure: Your home is collateral for home loans, including refinance mortgages, while credit card debt in unsecured. By converting credit card debt to mortgage debt, you increase your risk of being unable to pay your mortgage.
- Costs: Carefully compare mortgage quotes and research closing costs. These costs offset (and can even cancel out) the savings realized by consolidating your debt. Mortgage lenders almost always charge higher mortgage rates for cash-out refinances.
- Increasing debt: If your credit card debt was caused by recreational shopping, you could risk incurring more after refinancing your mortgage. Discussing your credit card debt relief options with a HUD approved credit counselor can help resolve debt management problems.
- Home equity erosion: Increasing your mortgage balance ups the risk of owing more on your mortgage than your home is worth. This could cause you financial problems if you need to sell your home or move.
Understanding the benefits and risks of refinancing for debt consolidation can help you determine if refinancing your mortgage is your best debt management option.