Replacing credit card debt with a second mortgage

Posted by  on Mar 09, 2017

Q: Is it a good idea to take out a second mortgage to pay down credit card debt?

A: Certainly, replacing credit card debt with mortgage debt is a good way to reduce your interest rate. However, if it is not part of a strict budgeting plan designed to pay down debt over time, the strategy can backfire.

On the surface, the trade-off seems like a no-brainer: the average credit card charges about 13.5 percent in annual interest, while mortgage rates are running about a third of that. However, if handled incorrectly replacing credit card debt with mortgage debt could actually cost you more in the long run, and even put your home in jeopardy.

Here are three components to making this strategy work:

  1. Monthly mortgage payments. If you are having trouble with your credit card payments, make sure you won't have the same trouble making the payments on the second mortgage. Taking on mortgage debt raises the stakes - it means you are putting your house on the line.
  2. Don't add to credit card debt. Have a budget plan not just to make your new mortgage payments, but to do so without immediately starting to build your credit card debt back up.
  3. Pay second mortgage rapidly. Besides lowering your interest rate, using a mortgage to pay off your credit card debt can also stretch that debt over a longer period of time. However, even with a lower interest rate, this can cause you to pay more interest in the long run. Shoot for a shorter mortgage, and look at an amortization schedule to see what interest expense you'll be incurring.

Using a second mortgage to refinance credit card debt can take some immediate pressure off your monthly budget. However, it only works well in the long run if you use that immediate relief as an opportunity to impose a lasting budget discipline on yourself.


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