Taking on new debt to deal with existing debt might seem like walking backwards to get ahead. However, this can be a viable strategy when it is carefully considered and applied. With that in mind, here’s when refinancing to consolidate credit card debt makes sense.
The Concept of Home Equity
First things first, you must have equity in a property to refinance it. This means the value of the property must be greater than the amount you owe on the loan you took to get it.
As an example, let’s say your home is currently valued at $750,000 and you’ve paid your mortgage down to $375,000. This gives you $375,000 in equity in your home.
In other words, the house is worth $375,000 more than you owe on it, so that money is “yours” to do with what you will.
How Refinancing Works
Assuming you’ve paid all your other debts according to the terms of your loan agreements, and your income will support the new monthly payments, financial institutions are more than happy to lend you money against that equity.
Basic refinancing involves taking out a whole new loan for the current value of the property and keeping the difference after you pay off the original mortgage.
You can also get a line of credit against the amount of equity you have in the property and keep your original mortgage, although this will give you two home loan payments each month.
Consolidating Credit Card Debt with Home Equity
The money is yours to do with what you will when you refinance a property, whether you do so outright, or take a home equity loan. This means you can use it to pay off your credit card debt in full — assuming you have sufficient equity available to do so.
The biggest plus here is that mortgage loans have much lower interest rates than credit card issuers charge. This means you can pay off high interest debt with low interest money, which is a win.
Another advantage here is that by combining several credit card bills into one monthly payment, your finances will be easier to manage.
Moreover, that single monthly payment on the refi could be lower than the combined total of the credit card payments you were previously making. You only must be careful to avoid extending the loan term such that you wind up paying more overall than you would have if you’d paid off the credit cards without doing a consolidation.
Refinancing to consolidate credit card debt makes sense when all these factors align in your favor.
You must be very careful here though.
The Big “But”
In addition to making sure you’ll come out ahead when all is said and done, you must be absolutely certain you’re dealing with a competent lender, as these PHH Mortgage reviews illustrate. You’ll also encounter fees, including appraisal costs and closing costs, which could mitigate the advantage you’d gain from doing the refi.
Most critically, though, you must be certain you can pay that new loan on time and in full. Otherwise, you could wind up homeless. Credit card obligations fall into the category of “unsecured” debt, while mortgage-backed instruments such as refinancing and equity loans are “secured” debt. The latter means the property against which the loan is written serves as collateral for the loan.
Should you become unable to hold up your end of the loan agreement, the lender can force you to sell the property so they can get their money back. This could mean losing your home. Therefore, it is imperative to ensure that the underlying cause of your financial difficulty is resolved before taking out the new loan.
These are among the most important factors to keep in mind as you’re considering when refinancing to consolidate credit card debt makes sense.
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