Your home is one of the single largest investments you will ever make in your lifetime. After making payments and upgrades to your home for years, you will build up equity in that home that can be used in several different ways. One way that people use the value they have built up into their homes is to refinance their mortgage and use the extra money to consolidate unsecured credit card debt.
To most people, the idea of being able to use the value they have built up in their homes to take care of their financial issues seems like a great idea. It makes you feel like you have worked hard and can now reap the benefits of your hard work.
Before you sign on the dotted line with that refinanced mortgage loan, there are some things you need to take into account. A refinanced mortgage to pay off unsecured debt creates many different situations that you need to be aware of before making the long-term commitment.
– Unsecured Debt Turns into Secured Debt
The process of using a refinanced mortgage to pay off unsecured credit card debt suddenly turns that unsecured debt into secured debt with the collateral being your home. If you are unable to make the payments on the mortgage, then not only have you defaulted on your consolidation, but you have also put your home in jeopardy as well.
It is a big decision to make the move from turning unsecured debt into secured debt. Be sure that it is the right move for you before you make that decision.
– Interest Rate
When you are consolidating unsecured credit card debt, you need to make sure your consolidation loan has a lower interest rate than your credit cards. The theory is that you will lower your interest debt if you can lower the interest rate on the balances that you owe.
When you use a second mortgage to consolidate your debt, you should get a fixed interest rate to prevent your debt from getting out of control. If your credit cards were at 15 percent interest and the variable rate on your refinanced mortgage climbs to 18 percent over the next few years, then you are paying more for your credit card debt than if you had just taken care of it yourself.
– Loan Term
A refinanced mortgage can be anywhere from 10 to 40 years in length, but the most common term is 30 years. If you plan on living in your home for 30 years, then this is not an issue. But if you are using a refinanced mortgage to consolidate your debt, then the term will affect whether or not this is a good deal.
It is always a good idea to examine your debt before you consolidate it. If you have several cards with low balances, then it would be advantageous to take care of those on your own and not take on the added responsibility of 30 more years of a mortgage. A smart debt move is to pay off the debt as quickly as possible. A debt move that could come back to haunt you is extending small credit card balances into 30 more years of debt with interest.
– The “Rebound Factor”
One of the things that credit experts recommend is keeping old credit accounts open and even using them from time to time to boost the credit score. If you have made the 30-year commitment to refinance your home and then used the extra funds to consolidate your debt, then you may put yourself in a bad situation.
If you do not address the spending habits that ran up that debt in the first place, then you could be setting yourself up for the “rebound factor.” This is a situation where you pay off your credit card debt and then feel obliged to run up your balances once again.
Refinancing your home can be a convenient way to pay off your cards, but it is not a long term debt solution. You need to address the core of the problem to really address your debt.
Contact us today for a debt analysis, and let us show you a program that can help you get out of debt without refinancing or a second mortgage. We will let you know what the best course of action would be for your situation and we will help you determine if a refinanced mortgage is your best bet.
Let our staff of experts go over your financial situation with you to develop a plan that will work. We offer debt settlement services that will get you the results you need to get your financial world back under control.