Refinancing to Pay Off Debt Can Be Risky

Posted by  on Jan 25, 2010

American households with credit cards had average outstanding credit card debt of $10,679 at the end of 2008, according to the Nilson Report. If you're among the millions of people struggling to pay off debt, refinancing your mortgage to pay off credit cards may be tempting. But doing a home refinance for this purpose may not be the most prudent move.

Refinancing Can Consolidate Debt

If juggling multiple debt payments every month has your stress level soaring through the roof, a mortgage refinance could help. Refinancing can combine all your debts into one mortgage loan. This can be a useful tool if you have not only credit card debt, but also auto loans or other personal loans.

Doing a home refinance also can allow you to slash the total amount of interest paid on credit card debt. Current mortgage rates are going to beat credit card rates any day. For example, 30-year fixed mortgage rates averaged 4.58% at the end of November 2009.

Your Home as Collateral

But combining all these debts together in a home refinance means that you are using your home as collateral for all that debt. That can be risky if for some reason you can't keep up with the mortgage loan payments. You could end up losing your home because of adding the extra amount to the mortgage. In addition, you will be unable to discharge credit card debt in a bankruptcy if you turn it into debt secured by your house--something to consider if you think financial problems might be in your future.

Negative Home Equity

The housing downturn has been brutal for some folks. Many homeowners have seen their home values plunge so much that they now have negative equity, or owe more than their properties are worth. Wrapping credit card debt and other loans into a mortgage refinance takes away the amount of equity you have in a home. Even if you aren't currently underwater on your mortgage loan, there's no guarantee that housing values won't continue to fall.

Furthermore, if you end up owing more on your mortgage loan than the house is worth, it could be tough to sell at a favorable price later. People who have plans to move in the near future may be better off skipping a refinance.

Mortgage Loans and Closing Costs

Another disadvantage of refinancing to pay off credit card debt is having to pay closing costs. Although some mortgage lenders may offer refinancing with low closing costs (typically home equity loans), fees for cash-out refinancing can add up to thousands in other cases. Mortgage lenders must give you a Good Faith Estimate (GFE) of settlement charges and the loan terms within three business days of applying for a mortgage. If your loan agent presents deals from several lenders, request the GFE before you actually apply. Some refuse to provide it, but ask anyway.

Alternatives to Pay Down Credit Card Debt

Despite today's mortgage rates being so low, there are some alternatives to refinancing that make more sense when it comes to paying off credit cards.

  1. Find a debt counselor to help put together a plan to aggressively pay off debt using your current income. For this strategy to work you must stop using credit cards, put together a solid budget, and cut out unnecessary expenses.
  2. Debt settlement is being used by more and more Americans looking to get out from under credit card debt. This approach involves negotiating with creditors for a lower payoff amount than what you owe. In some cases consumers have had their credit card debt reduced 50% or more. Avoid using debt settlement companies that charge an upfront fee to negotiate with creditors.
  3. Get a second job to boost your income. It's a tough job market out there so you may be wondering where in the world you can get hired. If you have difficulty find additional employment, consider starting a home-based business to supplement your income.
  4. Sell your stuff. Maybe it's time to get rid of some of the goodies that got you into debt in the first place. Hold a yard sale, run eBay auctions, or get a table at a local flea market.

Ultimately, the goal is to pay off credit card debt without putting your home in jeopardy. While refinancing can work for some people looking to consolidate debt, it's not the best solution for everyone.


  • Some homeowners with credit card debt may decide to refinance to consolidate their bills.
  • A home refinance can give you one payment and lower the interest paid on credit card debt.
  • Refinancing too much debt into a mortgage could lead to negative equity.
  • Closing costs can add up to thousands of dollars.
  • Alternatives to doing a mortgage refinance can help you avoid putting your home at risk.


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