Credit card debt is the third largest source of debt for US consumers after student loans and mortgages. According to the Federal Reserve, credit card debt in the United States reached $890.9 billion in 2015, with the average indebted household owing more than $15,000.
Homeowners who have equity built up in their properties may have some options when it comes to paying off their credit cards. Taking advantage of low interest rates, while they last, can help you take control and pay down your credit card debt.
With so many people owing so much, it may seem like a good idea to refinance your mortgage in order to pay those credit card balances down. But before you do, find out what the pros and cons are, and how they might affect you.
Interest rates on mortgages have been in the single digits for some time now. Even though rates are inching upward, the rate you’d get on a refinance beats what you would be paying on your credit card balance. With the average credit card interest rate hitting 14.89% at the start of this year, borrowing on the equity you’ve built up on your home might be a good option to reduce how much you’d be paying in the long run.
Another plus to utilizing your refinanced mortgage for paying down your credit card debt is the potential tax incentive. The interest paid on your home loan may be deductible, but interest paid on your credit card debt is not.
Depending on how many credit cards you have, and how many have a revolving balance, refinancing can help you simplify your financial situation. Rather than paying down multiple credit card balances with varying interest rates, you’ll be able to pay down your debt with a single payment and one interest rate.
The amount you can borrow against your home can be much higher than a typical loan. If you’re having trouble getting approved for a loan, or for a low interest rate credit card to transfer your balances to, refinancing may be a better option. You might be able to borrow up to 85% of your home value, depending on your lender.
Refinancing your home in order to eliminate credit card debt can be a risky move. You’re essentially putting your house on the line. If you’re worried you might not be able to stick to a disciplined financial plan to stop adding to your existing credit card debt, refinancing may not be your best option.
Depending on what type of home loan you take out, refinancing may cost your more in the long run and get you into trouble. An adjustable rate mortgage can save you money, but if you’re planning on taking some time to pay down your debt through refinancing, your rate could potentially go up, negating any gains you’ve made on eliminating your debt.
The added costs of refinancing might make borrowing against your home a more expensive option than simply paying down your credit cards. When considering a refinance, don’t forget to add in the impact of closing costs and fees.
Depending on how much you owe, refinancing to pay off your credit cards may simply prolong the amount of time you remain in debt and the amount of interest you’re paying on it.
Depending on what your goal is, using a refinance to pay down your credit card debt might be a good option. Evaluate your financial situation, consider all of your options, and see if a refinance is right for you.
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