Refinancing for Debt Consolidation: Calculating Potential Benefits

If you've owned your home long enough, you may qualify to refinance your mortgage for enough to pay off credit card debt and other bills. Refinancing your mortgage for debt consolidation can be a good option if you want to pay less interest on--and thus more quickly eliminate--consumer debt.

Credit Card Debt:" I Pay, and Pay, and it Won't Go Away"

Unlike your home and car, credit card debt is not secured and the credit card companies have little chance of collecting if you cannot pay. Sure, they'll call day and night, send stern letters, and may even attempt to garnish your wages. When things get to that point, consumers may file bankruptcy and eliminate most if not all of their unsecured debts.

Credit card companies typically charge high interest rates that compound differently than simple interest. Variable rates and the addition of fees can cost you more. Use loan comparison calculators and refinance calculators for comparing your current mortgage terms against refinance terms and for estimating the costs associated with refinancing. Because refinancing requires paying closing costs, refinancing for debt consolidation alone may not be worthwhile.

Cash-out Refinancing and Debt Consolidation

Here's how and why cash out refinancing may help with debt consolidation:

  • Personal debt consolidation loans are hard to find at reasonable rates: Lenders no longer offer personal loans for debt consolidation as freely as they once did. Tight credit guidelines mean that you may not qualify for enough to liquidate all of your debt, or you may not qualify at all. With current low mortgage rates, it's almost certain that you could not find an unsecured personal loan for rates as low as mortgage rates.
  • Reducing credit card balances can improve your credit: Many households make installment payments on credit card debt month after month, but notice little change in their balances. If you use more than 35% of your credit line on any account, this can reduce your credit scores. Paying off credit cards and limiting their use to what you can repay in each billing cycle saves money and can help improve your credit.
  • Simplify your finances: Refinancing for debt consolidation can help you roll several monthly bills into one monthly mortgage payment, but won't work if you resume charging more than you can pay off each month.

Discussing your refinancing plans with a financial advisor can help determine possible benefits specific to your circumstances.