Homeowners that are dealing with a large amount of debt sometimes turn to cash-out refinancing as a way of consolidating their debt and getting rid of their monthly payments associated with this debt. However, cash-out refinancing is something that must be considered before a homeowner proceeds as there can be a downside to using this option as a way of handling debt.
Most debt, like credit cards, is unsecured debt and can result in a drop in one’s credit score if unpaid or if the debtor decides to default on what they owe. However, a secured debt, like a home loan, is a bit riskier since if this debt goes unpaid a homeowner will lose their home. Essentially, when someone uses cash-out refinancing they are attaching unsecured debt from sources like credit cards or loans to a secured debt, which is their mortgage.
Many people may be able to refinance their home loan and get enough money to pay their way out of debt, but they are attaching their previous unsecured debt amount to their mortgage and if there is a problem or a failure to pay this increased amount in their home loan, the homeowner will be without a house. The reason many advisers caution against cash-out refinancing is if someone has allowed their debt to get out of control to the point that they need to use their home’s equity to pay off what they owe, there’s a high likelihood that their mortgage payment, when this debt is attached to it, may become too difficult as well.
Homeowners who are considering cash-out refinancing need to make sure that they are in a financial position in which they can afford their home loan payment and that they will begin to practice new financial strategies so that they will not get in over their heads with their debt. While owning a home is quite costly, credit card debt or personal loans are not essential debts that one must acquire and through various savings and budgeting techniques anyone can avoid debt in most cases.
While the recession and job market has taken its toll on many people’s finances, and many people have acquired a large amount of debt while simply trying to keep their head above water, using a home to handle these various forms of unsecured debt can, again, cause a homeowner to find themselves homeless. While cash out refinancing can be a good option for a homeowner who can afford to do so and meet the costs of attaching the debt they’re paying off to their mortgage, it is not a type of financial move that should be made unless the homeowner gives the situation much thought and consideration.