Homeowners who have a large amount of debt sometimes turn to their home in order to combat or pay off these various sources of debt. Homeowners will use cash-out refinancing in order to get the money they need to pay their way out of debt.
While this may be a method in which a homeowner can make their debt more manageable, there are financial advisers who warn against using refinancing to pay off debt. Cash-out refinancing essentially is using the equity one has built in their home to get money which they use to pay off various debts. While this can be a viable option for someone who has multiple sources of high interest debt, homeowners need to understand the risks that come with this form of debt consolidation.
Credit card debt, which is very common among many people, is unsecured debt that many people struggle to erase. However, when this debt is paid off using a home loan, the interest rate attached to a home loan is, typically, smaller but now this unsecured debt has been attached to secured debt and if unpaid will result in the loss of one’s home.
While many homeowners refinance for a variety of reasons, the trouble of refinancing to pay off debt is that when someone’s debt exceeds their ability to pay usually points to poor financial practices. Homeowners who are constantly in debt may find that adding money to their home loan amount causes more problems.
Before using a refinance consolidation loan, it will be important to look at your financial situation and make sure you can afford the costs that come with refinancing so that you will be able to pay your home loan with without acquiring more debt that may cause you to become delinquent on your mortgage payment.