There have been many homeowners who have used their home as a way to pay off debts like credit card debt. Homeowners have used cash-out refinancing as a way to gain the funds they need from their home in order to erase their debt quickly. However, many question as to whether this method is beneficial for homeowners who are trying to erase credit card debt with their home.
Essentially, cash-out refinancing allows a homeowner to replace their first home loan with one that is more expensive, but when refinancing a home owner is given cash back which they may use to erase debt from sources like credit cards. Obviously, homeowners must have equity in their home before this can be used, but financial advisers are quick to point out that cash-out refinancing isn’t truly erasing debt.
Anyone who uses this type of refinancing to pay off credit card debt is essentially moving one form of debt to another. While credit card payments are no longer due, a higher amount is now placed on one’s home, which could be problematic. Despite the fact that a mortgage interest rate is typically much lower than credit card interest rates, there is concern over a homeowner’s financial habits when cash-out refinancing is considered.
If a homeowner has poor financial practices, which has led to a high amount of credit card debt which they cannot meet, there is often concern that by adding more to their home loan amount they may face a similar problem in the form of the inability to meet these monthly mortgage payments. Obviously, if a homeowner cannot pay a higher amount on their mortgage they will not be dealing with an unsecured debt but will lose their home as a result.
Individuals who have successfully used cash-out refinancing have drastically reduced or stopped spending on credit cards after refinancing and have focused on paying down their mortgage principal in order to reduce the overall home loan costs they have now acquired. While using credit cards can be beneficial, homeowners who are considering cash-out refinancing must realize that becoming dependent upon credit cards or spending outside of their financial means to repay will surely lead to a worse financial position if they use cash-out refinancing to pay off these credit card obligations but continue to acquire credit card debt in the future.