Credit card debt can sometimes make it seem as though the more you pay, the more you owe. Regardless of what you do (short of paying it in full), your balance stubbornly remains high. Looking to kill it once and for all, you’ve hit up the idea of pulling the equity out of your home to lay that debt to rest.
However, does refinancing to pay off credit card debt make sense? It can — in some instances.
When you refinance your home and use the proceeds to pay off credit card debt, you’ll lower the interest rate you’re paying on that debt.
The average credit card annual percentage rate (APR) is usually in the neighborhood of 14 percent. Meanwhile, the 30-year fixed rate home mortgage is always much lower, because it is secured by the property against which the loan is written. The APR on credit card debt is higher because it is unsecured.
Fewer Monthly Bills
Rolling your credit card debt into your mortgage payment will give you fewer bills to track each month. It can also lower the amount of cash you have to pay out on a monthly basis. This eliminates the potential for fees accruing on your cards if payments are late or missed. You’ll also eradicate the potential hit your credit score takes when those payments are absent or tardy.
More Effective Than a Balance Transfer
The equity you have in your home can usually cover more debt than a credit card balance transfer. Further, you’ll still be looking at credit card APRs as opposed to the much lower home mortgage interest rates.
Be Certain You Can Pay
This one gets back to the fact that this debt is unsecured, while a home mortgage — even when you refinance — is a secured loan. If you can’t make the new payment, your home could be foreclosed upon. In other words, you’ll trade unsecured debt for secured debt.
A company like Freedom Debt Relief could help you negotiate more favorable payoff terms in dire financial situations on most unsecured debt. However, secured debt is impervious to pretty much every form of relief — save bankruptcy.
Consider the Remaining Mortgage Term
If you’re more than 15 years into your mortgage, refinancing might not make sense because you will be starting your home loan over from scratch. This is a significant issue because interest payments on mortgages are front-loaded.
Said differently, mortgage bankers take their profit off the top.
The vast majority of your early payments go toward paying interest rather than reducing the principal loan amount. Before you decide to refinance, take a look at your loan schedule to see if you’ve passed the threshold at which most of your payments are going to principal. If you have, a better strategy might be to consider a personal bill consolidation loan from a company, such as Consolidation Plus.
Watch Your Loan to Value Ratio
Make sure there’s enough equity in the property to cover all of the credit card debt while maintaining a loan to value ratio on your home of 80 percent or less. Otherwise, you’ll pay mortgage insurance, which could diminish the financial advantage of taking the loan. There are fees to pay when you refinance a mortgage as well. All of these issues must be taken into consideration before making a decision.
One More Thing
If you choose to pay off your credit card debt in this manner, keep the accounts open so they continue to benefit your credit score as long-standing accounts. However, take those cards out of your wallet and don’t use them. Remove them from all of your online shopping accounts and subscriptions as well. Otherwise, you could find yourself with the exact same problem all over again — this time, lacking the equity to tap.