When you’re struggling with debt, it’s easy to go for the solution that will bring you the quickest relief. Many people choose to refinance their home and roll credit card debt into the new mortgage in order to get the cards paid off and start with a clean slate.
While this move might make sense at first glance – especially with the current mortgage rates being so low – there are some things you may want to think about before refinancing credit card debt onto a home loan.
Am I really done using debt?
The first question you’ll want to ask yourself before transferring your credit card debt to your home mortgage is, “Am I really done living above my means?” Refinancing credit card debt alone does not solve the behavior problem that created the debt to begin with.
It’s important before taking any debt consolidation steps to make sure you’ve figured out why the debt occurred in the first place and resolve any causes for overspending or living above your means before you make any plans to add the debt onto a home mortgage or home equity loan.
If you don’t deal with the issues that were coaxing you to overspend in the first place, you could end up in a worse place financially than you were before the refinance – with a bigger home mortgage and more credit card debt to pay off.
Have I counted the costs of refinancing my debt into my mortgage?
Mortgage refinancing can be expensive. A refinance of a home mortgage usually comes with closing costs that are either paid upfront, added into the loan or added via a higher interest rate.
Also, when refinancing debt onto a mortgage, you can potentially stretch your credit card debt out to thirty years if you take out a thirty year loan and you’re not committed to paying extra on the mortgage. Thirty years – or even fifteen years – is a long time to deal with credit card debt.
Thirdly, adding additional monies onto your mortgage balance lessens the cushion of equity you have in your home. If another housing bubble burst came, would you still have plenty of equity in your home to sell and not come out upside-down on the deal?
These are some of the hidden costs of refinancing your debt into your home mortgage.
Have I tried other options?
It might be helpful for you to try some other options to get your debt paid off before going through with a mortgage refinance. Here are some ideas…
Debt snowball or debt avalanche
Both the debt snowball and the debt avalanche are powerful tools for paying off debt. My wife Kim and I paid off $52,000 of debt in just eighteen months by using the debt snowball. To use the debt snowball, you list your debts in order from the lowest balance debt to the highest balance debt, along with all of their minimum payments, like this:
|Debt||Minimum monthly payment||Balance owed|
After you’ve listed your debts in order, you focus on paying the lowest debt balance off first. You pay minimum payments on every debt, and all extra money that you have to put toward debt goes toward the first debt on your list. When that debt is paid off, you take the minimum payment you were paying on that debt, add it to the minimum payment on the next debt, and throw any additional monies toward the next debt until it is paid off too.
You just keep on at the list in this order until everything is paid off.
The debt avalanche works similarly, except for that you start by listing your debts according to interest rate, starting with the highest interest rate and ending with the lowest interest rate. You pay off the highest interest rate debt first, putting all additional monies toward that debt and then moving on down the line as the debts are paid off.
Both of these options are great options for paying debt off quickly.
Another way to speed up debt payoff is to transfer your high interest rate credit card debt to a zero balance offer or a credit card with a much lower interest rate.
Once the balance transfer is complete, use any extra money you have to pay the debt down quickly. Because you’re now paying little to no interest on the card, much more of your money will go toward the principal balance and your balance will be paid down much faster.
There are many companies out there that offer credit card consolidation loans that will charge a much smaller, fixed interest rate along with a fixed loan term. This will help you avoid the long process of paying off a credit card when you pay only the minimum and pay a higher interest rate.
Companies like Sofi often give loans for interest rates of under 10%, saving borrowers hundreds and thousands of dollars in cash as they pay off their credit cards under a newly consolidated, less expensive loan.
While refinancing your home may seem like a smart move for paying off credit card debt, the other options mentioned above can save you more money, more time and can get you out of debt faster.
When the debt is gone you can then begin on the road to building wealth!
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