Homeowners Use Home Equity To Pay Off Credit Card Debt But Some Financial Advisors Dislike Cash-Out Refinancing

Homeowners who have acquired a large amount of credit card debt have been turning to the equity in their home as a way to access capital which they can use to pay off their credit card debt. Some homeowners have obtained a home equity loan, while others have used cash-out refinancing as a way to get out of debt. Yet, there are financial advisers who warn against cash-out refinancing as a means to pay off unsecured credit card debt.

Credit cards have become a lifeline for many Americans in our nation and, as result of living outside of one’s financial means, credit card debt is quite common. However, cardholders who come to the realization that they have out-of-control credit card debt and need to stop their spending and gain control over this debt often use a variety of ways to do so. However, many homeowners, rather than systematically making payments on their credit card debt, turn to their home in order to obtain the funding they need to pay off this debt.

Cash-out refinancing is a means which homeowners can use to gain cash from equity in their home loan, without obtaining a second mortgage, and use these funds to pay off the debt they have from various sources, like credit cards. However, these financial advisers who warn against using this method to get out of credit card debt often point to the fact that cardholders who take these actions are attaching unsecured debt to a secured home loan.

Many worry that credit card debt may point to poor financial habits which could lead to trouble if the increased amount a homeowner owes on their home after cash-out refinancing cannot be met. When a homeowner takes unsecured debt from credit cards and applies it to their mortgage it, obviously, increases the total amount they owe on their home loan.  Yet, debt was not truly erased, just moved around, and the concern by many financial advisers is that if homeowners couldn’t handle unsecured debt when separate then they will be unable to handle that debt that is now mingled with their mortgage.

This can create a situation where homeowners end up missing payments on their home loan, which could lead to delinquency or worse.  For this reason, financial advisors try to dissuade homeowners from mixing unsecured debt with their mortgage, but there are those who have used cash-out refinancing to their advantage.

However, before a homeowner uses cash-out refinancing to deal with debt, like credit cards, they are prompted to look at their financial situation and make sure they can afford the costs and consequences that come with cash-out refinancing and using one’s home equity to combat credit card debt.