Homeowners with a large amount of debt will sometimes consider consolidating this debt by obtaining a debt consolidation refinance loan. Some people term this as cash-out refinancing, as a homeowner is essentially using the cash from their home’s equity to pay off their debt.
There are some people who would say this is a good idea because most debt, like credit card debt, comes with a much higher interest rate than a mortgage. By refinancing your home loan you are essentially putting that debt that you owed on credit cards and attaching it to your mortgage, which again, comes with a lower rate.
There are those who feel that this is a very dangerous practice and should not be used by anyone with debt. The argument here is that debt that has become unmanageable is usually the product of bad financial habits. Attaching debt to a mortgage turns that debt from unsecured to secure debt, which means that if a homeowner is unable to pay their mortgage due to the added amount attached from refinancing, they will lose their home.
Better routes can be found for dealing with debt aside from cash out refinancing. Homeowners will often use their home’s equity for a variety of purchases or upgrades to their home, but this doesn’t mean that it’s always a good idea to use the equity in your home since it will add to what you owe on your mortgage. People who feel that home equity should be left untouched definitely believe that consolidating debt or simply paying off debt through a home equity loan is a bad idea.
Most of the time consolidating debt either through a debt consolidation loan or through a debt consolidation refinance loan will cost more money over the long run than if the individual with a large amount of debt had attacked their debt sources separately. There are endless resources online and advisors available to help any homeowner who may be struggling with debt and considering using their home to pay off what they owe.
A homeowner needs to consider the pros and cons of using their homes equity to pay off debt and if their debt is the cause of bad financial habits, there will be a necessity to develop better practices when it comes to dealing with their money and what they owe to various creditors.