Refinancing your Home Loan to Consolidate Debt

January 31st, 2006

Money

With the hints of higher interest rates, it may be time to lock in all your credit card debt by refinancing your Home Loan. Not only are higher interest rates looming, you also have to worry about new laws that have doubled the credit cards minimum payments.

If you only have $10,000 in credit card debt you are probably better off paying the debt or getting a second on your home. The reason for this is because the cost to refinance a home loan is usually not a free service. If you shop around you should be able to avoid some loan fees.

While some people refinance a mortgage for a lower interest rate, others are faced with consolidating credit card debt. The advantage to refinancing the credit card debt with a home loan is that mortgage interest is deductible on taxes, where credit card interest is usually not deductible.

Refinancing your credit card debt is a good idea, because new bankruptcy laws may not let you walk away from this debt. If you can’t make the payments and you go bankrupt you still may have the credit card companies to pay off. If you have any equity in your house you would lose it anyways, so refinancing is just a way to lower your overall monthly payment. By lowering your monthly expenses you may find it easier to afford everyday expenses.

You should try to get a fixed rate loan and one that does not have penalties if you want to pay it off sooner than the term. Hopefully the loan you currently have does not have penalties attached for early pay off. Make sure to check into all the fine print, including any new fees for a new loan as well as penalties and points. You can shop online through a loan broker service to find the best loan deal. If you go to just one lender you may have not got the best loan with the lowest loan fees.

Avoid home loans that have APR’s. The rate can be slightly less than a fixed rate loan but you put yourself at risk for higher interest rates and higher payments when interest rates rise. Also avoid loans that have balloon payments after a time period, a low payment sounds great until the balloon payment arrives. A lot of people try to get the lowest payment possible because they would not otherwise afford the house. This is a reality that you might be faced with, but treat these options as a last resort.

If you have the credit card debt and you do refinance, it might be time to cancel some or all of your credit cards. If you don’t address how you got the credit card debt in the first place you will likely find yourself in the same situation a few years later. You need to address the reasons that you have the credit card debt and try to avoid making the same mistakes in the future. Make a effort to pay with cash for everything. Paying cash will force you to set a budget and follow it. When you run out of cash, it is like a wake up call on how much everything costs. It will make you more conscious about how much you can spend in a month.