Many people who have a large amount of debt or who may be looking at a bad credit score due to financial troubles in the past often turn to refinancing their home loan in order to pay off their debts. Home loan refinancing is essentially attaching unsecured debt, like credit card debt, to your home loan which typically comes with a lower interest rate.
Some people feel that this is beneficial because you are taking a sum of debt that may be causing you difficulty and you’re attaching it to a lower interest mortgage, which you will be paying on for years anyway. However, one drawback to this is that unsecured debt will not cause the loss of a home if it goes unpaid, but if you refinance your home and pay off your debts with the money you get back from equity you have built up, you are essentially shifting unsecured debt onto secured debt which is your home.
If a homeowner has a large amount of debt but can easily pay their home loan payment than this type of debt consolidation may be a good option for them. A home refinance loan doesn’t erase debt and it’s important to keep this in mind, but rather it’s just shifting high interest debt onto a lower interest mortgage.
It should go without saying that if you are having trouble making your home loan payment that you might not be able to use this option without being in danger of losing your home. If you refinance your home it could extend the life of your mortgage or come with certain costs that you are unable to pay. It should also be known that if you have a bad credit score, you may not be able to refinance your home or if you are able to do so it may be at a higher interest rate than what you currently have.
Refinancing might work for some people who do not have a bad credit score but do have a lot of debt, but it’s unlikely that this will be beneficial for anyone who has a very low credit score and who wants to get rid of a large amount of debt. Before you consider refinancing as a way to pay off your debt, take the time to look at factors such as your financial situation, credit score, the amount of equity you have in your home, and if you’re able to refinance at all.
Taking the time to step back and consider what it will entail to pay off debt by refinancing your home is not something that should be done hastily and it should be done with a great amount of care to make sure that refinancing your home to rid yourself of debt is going to absolutely be in your best interest both in the short-term and long-term.