Everyone knows that credit card debt is “bad” due to the high interest rate on most consumer credit cards, while mortgage debt is often described as “good” debt. But sometimes the distinction between “good” and “bad” debt is not so clear. In fact, because of this generalization, some people make the decision to refinance their mortgage to free up money to pay their credit cards. If you are considering doing this, you should realize that it is seldom or never a good idea to pay off credit card debt with the equity in your home.
For example, if your home is worth $ 200,000 but you owe only $ 100,000 to your mortgage, you may be able to remove part of the ability to pay off debts with a higher interest rate attached to it than what you have on your mortgage pays.
Why refinance is not a good idea
There are many arguments that people advocate refinancing a home mortgage to withdraw money to pay off their debts. For example, mortgage interest is tax deductible, while the interest on credit card debt is not. Moreover, credit cards can have an interest of up to 30%, while the mortgage interest is normally less than 6%.
If you consider these benefits, why not earn money again to lose your high credit card debt? Although it sounds tempting, there are unfortunately a number of reasons why this is a terrible idea:
Unsecured debt is converted into secured debt
The biggest reason why you should never convert credit card debt into mortgage debt is because you ultimately convert unsecured debt into secured debt. Credit card debt is unsecured because there is no collateral attached to it – the credit card company only has your word that guarantees the debt. If you do not pay, credit card companies can sue you, but they should not get into trouble unless you owe a lot of money. Moreover, even if you are being prosecuted, the company cannot just take your house with you. It can establish a lien on your home, but credit card issuers usually cannot oblige you to sell it.
With a mortgage, on the other hand, the house is the collateral for the loan. The mortgage company has a security interest in your home, and if you do not pay your mortgage bill, it can and will be protected on the property. A mortgage lender has much less legal hoops to jump through to influence your property rights and in some states that allow for non-judicial executions, it does not even have to go to court to make a foreclosure as soon as you stop making payments.
The difference between secured and unsecured debts
Since the credit card debt is unsecured, it can be released in bankruptcy. If you submit Chapter 7, the debt may disappear – you will have to transfer a number of assets, but bankruptcy exemptions in most states will ensure that your property does not belong to those assets. If you submit chapter 13, the credit card debt can be reduced. However, under Chapter 7 or Chapter 13 bankruptcy, you cannot lose a mortgage debt if you want to keep your home, and you must continue to pay your mortgage and confirm your commitment to do so.
You take a big gamble by turning unsecured credit card debt into secured debts. In essence, you bet that you can repay the debt – and bet your house on it. Remember that if you do not pay your credit card debt, you will be warned. You will not lose your house. If you do not pay your mortgage, you will lose your home.
Refinancing of costs Money
Refinancing a house is not free. You usually have to pay for a valuation and possibly a home inspection. You also have to pay license fees for loans and closing costs. The exact costs of refinancing depend on your credit score, your mortgage provider and the amount of your mortgage. However, according to a 2008 Bankrate Survey, the closing fee for refinancing an $ 200,000 home averages $ 3,118. This means that although your mortgage interest will be a lot lower than the interest on your credit card debt, you can save a lot of what you save spend on paying for the closing costs.
You must pay your debt for a longer period of time
Unfortunately it will probably be dr. It may take you much longer to repay your mortgage and credit card debt if you add your mortgage balance. Mortgage loans are normally repaid over a period of 15 to 30 years, depending on your mortgage conditions. When you refinance your credit card debt and track it with your mortgage, you are actually paying your credit card bill for the entire duration of your mortgage. Do you still want to pay for the clothes or vacations that you have booked in 30 years? Because of the extra time it takes to pay off a mortgage, you can pay even more interest on the debt over the term of the mortgage loan than if you simply commit to paying off the credit card debt as quickly as possible.
It damages your credit score
When you take out a new mortgage loan to pay off your debt, you shorten the average age of your bills and a new application is made for your credit report. Both factors can be explained. Cause actual damage to your credit score. Although the impact may be short-lived (mainly because you no longer have high balances on your credit cards), you must realize that refinancing your home has an impact on your creditworthiness. In addition, a larger mortgage appears on your credit report, which can make some lenders nervous, depending on your level of income.
It makes your house harder to sell
When you sell your property, you must pay off the mortgage in full (except in special situations such as short sales) and you must also pay a property commission of around 6% on the sale price.
When you refinance and make your mortgage bigger, you create a situation where it is difficult to receive offers under your current mortgage amount. This is why banks generally do not allow you to refinance a home unless you can keep your total mortgage amount below 80% of the value of the home. But even this situation is risky – real estate values may fall quickly, or you may have to sell your house quickly due to a variety of circumstances, such as moving a job.
If you refinance your house and pay for all your credit cards
you will end up with a lot of credit. However, unless you have thoroughly revised your budget and spending habits, chances are that you will collect the credit card debt again. Within a few weeks, months or years you could end up with maxed out credit cards plus a higher mortgage due to the refinancing. You will be deeper in debt and you will not be able to turn to your house to bring relief. If you decide to refinance your home to pay off credit card debt, you absolutely have to make a sincere commitment not to go back in credit card debt.