Should I Refinance Home Loans to Pay Off Debt?

Refinancing home loans to pay off debt is one way to get your credit cards under control. But there are pros and cons. In this post, we’re breaking it all down.

Credit card debt is scary for anyone. It can feel like the debt continues to mount and mount, spinning out of control until you are suffocating in it.

Many people struggle with this type of debt.

In fact, the average American household has almost $17,000 of credit card debt. Because credit interest builds each month, it can be difficult to know how to handle this type of debt while still being able to afford other daily necessities.

While some people try to renegotiate their credit debt, one thing many fail to realize they can do is refinance their home.

If you have a mortgage that you are in the process of paying off, home refinance may allow you to use your home loans to pay off debt from credit cards.

This can be a complicated and risky process if done incorrectly, but with a little bit of smart thinking, it’s an effective way to deal with debt. Before you decide to do this, however, it’s important to know what it is and what benefits and risks come with it.

Read on to learn all about how home refinancing can allow you to use home loans to pay off debt.

What Is Refinancing

If you have a home mortgage, you likely have a specific interest rate that you were given at the time that you apply for the mortgage. This interest rate determines how much money you will be paying above the amount the mortgage was for.

Home refinancing is often done to lower this interest rate so that mortgage payments become more affordable. Refinancing is essentially trading out your existing mortgage for another one.

Most people do this to take advantage of lower interest rates that may be happening in the present. Since mortgage rates fluctuate from year to year, it’s typical that the rates from many years ago, when you apply for the mortgage, were higher.

This is an effective way to lower your monthly mortgage payments so you have more money in your pocket for other expenses. Some people fail to realize, however, this can also be used to take care of your credit debt.

Using home loans to pay off debt is a potential solution that should be considered with care.

Refinancing Home Loans to Pay Off Debt

The basic act of refinancing your mortgage for lower monthly payments can help with credit card debt by itself. When you have more money available to you each month, you have more money to pay off the existing credit debt.

This particular solution requires smart spending on your part. If you use the additional money you gain each month for other expenses or luxuries, you won’t benefit from the refinancing. However, if you are motivated to stay focused on your credit debt, chances are you’ll give yourself a fighting chance.

More than that, home refinancing sometimes can be done in a manner known as “cash out” refinancing. This particular form of refinancing allows you to take out the equity you have built up in your home over the years as an upfront cash payment.

People who choose to do this will often receive a large sum of money they can use to pay off high-interest debts, make large purchases, or spend any other way they see fit.

This can be an effective way to pay off credit debt since it provides a large sum to eliminate most, if not all, of the debt at one time.

Using home loans to pay off debt may seem like a no-brainer, but there are many different things to take into account before you make a final decision.

Pros And Cons

Just like any other financial matter, home refinancing carries a certain set of benefits and risks that you need to be aware of.

For benefits, people who choose to refinance their mortgage quite often can expect a lower interest rate on their monthly payments. In fact, this is a requirement in order to receive any noticeable benefit towards paying off your credit debt.

Second, by reducing or eliminating your credit debt, you can make your credit history more stable. Credit debt is often seen as riskier than mortgage debt, which means failure to pay off credit will impact your credit score more than mortgage payments.

Third, interest on mortgage payments is tax-deductible. This means that you can reduce the amount of taxes you pay by deducting this interest when it’s tax time. Credit interest is not tax-deductible.

Finally, mortgage payments are more predictable on a monthly basis.

Credit debt comes with a variety of factors that will influence your monthly payment, including the interest rate, minimum payments, and term changes. With anything financial, predictability means you can safely know what you will be spending on a monthly basis.

These benefits need to be weighed against potential consequences. Many of these consequences can be avoided if you are financially responsible.

For example, one of the biggest downfalls is financial irresponsibility after receiving a cash out. In other words, you may be more likely to spend the lump sum of money you receive on something other than your credit debt. This makes using home loans to pay off debt ineffective.

This may also increase the chance that you will increase your amount of credit debt. Human psychology sometimes works against us in this manner. When you see your credit line increasing again, you may be more tempted to go out and place the same types of charges that led you to this position in the first place.

None of this is to suggest that you are going to make mistakes if you choose to refinance your home. These potential pitfalls are simply a warning and a reminder for you to play it smart if you do refinance. Using home loans to pay off debt is effective as long as you are financially responsible.

Things to Consider with Loans to Pay Off Debt

Ultimately, the choice is up to you. Knowing the most important things to think about can help you make the best choice for you and your family.

The first thing to think about is whether you can actually refinance your home for the better. If mortgage interest rates are higher than the existing rate you are paying, you won’t see any benefits to refinancing. In fact, you may increase your monthly mortgage payments by doing so.

Second, you need to make sure that you are financially responsible enough to make the process work. Using home loans to pay off debt requires you to focus on what is most important. Using the extra money you will receive on other things besides the credit debt won’t do you any good.

This means you have to be honest with yourself. If you feel like you’re the type of person who can’t commit to getting the credit debt paid off, then it isn’t worth the risk of having higher payments or putting yourself further into credit debt.

If you feel like both of these considerations are doable, meaning you know you will receive extra money and can spend it responsibly, then home refinancing may be right for you.

While you are being honest with yourself, you should also think about whether you are ready to handle the process of home refinancing. Even though you are essentially trading out your existing mortgage for a new one, the process isn’t that simple.

Home refinancing requires you to basically apply for a new mortgage. If you remember back to when you applied for your first mortgage, you may remember some of the hoops you had to go through to get it. Many of these challenges will be present this time along with new ones.

One of the biggest things to think about is your own financial history. What kind of spender are you? Are you the type of person who has handled their mortgage payments and responsibilities properly?

If you can answer “yes” to these questions, then you are most likely the type of person who can make home refinancing work for them. If not, then you should be honest with yourself and look at other options.

Using home loans to pay off debt is just one potential solution to conquering your credit debt. It’s not right for everyone. Those who fail to recognize this risk putting themselves into greater financial harm.

Getting Help

Making the decision to refinance your home is only the first step.

Using home loans to pay off debt is a complicated process that requires you to actually apply for a new home mortgage.

The success of this process is going to depend on how well you have been paying off your existing mortgage, your credit score, and other financial factors.

Despite the complicated process, this can be worth it if you’re truly dedicated to paying off your credit debt.

If you would like help trying to refinance your home, feel free to get in touch with us for more information. We can help you navigate the complicated process of home refinancing so you know what you’re getting yourself into.