Have you ever looked at your credit card debt and wondered how to make it vanish? I know I have. The hard work involved with paying down signature debt can be tricky, time-consuming, and demanding. If you have a home mortgage then you likely thought about refinancing to swallow up the credit card debt and place all that debt in one package. I recently did some looking at this approach to see if it should be included in our debt repayment toolbox.
Credit card debt comes as an unsecured line of credit, meaning you’re basically giving your word to payback what you use. A mortgage has your home as collateral, so if you do not pay you forfeit ownership rights. Mortgage loans typically last for 15 to 30 years. Credit card debt can pile up and pile up until its all a person can do to pay the minimum monthly payment. With the new credit card law in place, everyone can clearly see how long that minimum payment would take to actually payoff the entire debt. So the quick option would be the simply refinance the home and add all the unsecured debt to the mortgage. Here’s some pros and cons of that maneuver.
Pros
- Credit score will go up — eliminating all that credit card debt will look good on the credit report.
- More manageable monthly payments tied into the mortgage.
- Lower interest rates in mortgage than in credit cards
Cons
- Can be costly to refinance because you have closing costs associated with the loan.
- Refinancing can wipe out years of equity and prolong repayment.
- Can affect credit score and alter your interest rate (maybe in a good way).
It’s possible to refinance if you have equity built up, but that equity would have to be in place at the refinancing time period. That’s the unfortunate part of this market. Most houses went down in price, not up. So there’s not been a lot of movement in the positive direction for a lot of households.
And what’s the real benefit? If you manage to refinance and bundle all of your credit card debt into a new mortgage then you have to start back at square one, unless the refinance included shortening the repayment time from 30 to 20 or even 15 years, then it may be worthwhile.
So for the credit card debt repayment to really be worthwhile it would have to be a substantial amount, like over $20,000. A smaller amount, like $10K or $5K would not really be worth all the hassle of paperwork and closing costs. Unless you’re planning on reducing a 30 year mortgage to a lower year term, then refinancing to pay down signature debt does not make a whole lot of sense financially. It would better to just throw extra lumps of money at the debt than take on the additional burden of more years on the mortgage.
Should You Refinance to Eliminate Credit Card Debt?
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Should You Refinance to Eliminate Credit Card Debt?.
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