Homeowners who have acquired a large amount of unsecured credit card debt have turned to cash-out refinancing as a way to use their home to pay off their credit card debt fast. Getting out of credit card debt quickly is something that many people aspire to, but there are hesitations on the part of homeowners to use their house as a way to accomplish this goal.
Cash-out refinancing is viewed as beneficial by some for a variety reasons since a homeowner can acquire the money they need to pay off debt, like credit cards, without attaching a second mortgage to their home. There are some homeowners who use a home equity loan in order to obtain money for similar expenses, but homeowners who obtain a home equity loan over a cash-out refinance loan may do so because they may acquire a higher interest rate when refinancing.
While it comes down to an individual homeowner as to which road they take, according to financial website Bankrate.com, there are some key ways in which cash-out refinancing differs from a home equity loan and homeowners need to be aware of these differences. Some ways they differ are:
- A home equity loan is a separate loan on top of your first mortgage.
- A cash-out refinance is a replacement of your first mortgage.
- You pay closing costs when you refinance your mortgage.
- Generally, you don’t pay closing costs for a home equity loan. (-Bankrate.com)
Yet, there are concerns by many financial advisers who believe that using cash-out refinancing, or even a home equity loan, to pay one’s credit card debt off is a bad decision. Essentially, credit card debt which is unsecured debt, is being attached to a secured debt, in this case someone’s home, and if this increase in one’s home loan obligation is unable to be met then the homeowner will lose their house.
Many worry that the underlying cause of credit card debt could point to bad financial practices, which when factored into a situation where a homeowner adds more home loan debt obligation to their financial life could cause trouble. It’s for this reason that homeowners who are considering a cash-out refinance plan to deal with their debt should look at their personal financial situation and make sure it will be both affordable and in their best interest.
Homeowners may need to develop better financial practices if their credit card debt has gotten to the point where they must use their home in order to pay off what they know. Again, cash-out refinancing can be helpful for homeowners who wish to erase credit card debt quickly, but it can be more costly over the long run or cause financial troubles for homeowners who do not properly manage their finances when attaching a higher amount of debt onto their mortgage.