Erasing Unsecured Debt Through Mortgage Refinancing–Cash-Out Refinancing May Pose Problems

Unsecured debt sources, like credit cards, are a problem for many homeowners and, as a result, there have been homeowners who have turned to options like cash-out refinancing as a way to gain the funding they need to erase these debts. Yet, there are those who feel that cash-out refinancing, which uses a homeowner’s equity to provide capital, is simply a bad idea when it comes to paying debts like those associated with credit cards or personal loans.

One argument in favor of cash-out refinancing is that mortgage interest rates are typically much lower than those associated with debts like credit card and unsecured personal loans, and when this type of refinancing is used to pay off these higher interest debts, money can be saved in some cases.

However, financial advisers who caution against cash-out refinancing often point to the fact that if a homeowner has allowed unsecured debts to grow to an unmanageable level, adding this debt to a home loan could pose problems in the future. For instance, if a homeowner uses cash-out refinancing, which would essentially tack on unsecured debts to a mortgage, a homeowner may have trouble with this higher mortgage amount and face the loss of their home in the future.

In the past, homeowners who have successfully used cash-out refinancing have been those who were responsible with their money and did not acquire additional debts after they had paid off unsecured credit card or personal loans with money from their home’s equity. Cash-out refinancing does attach unsecured debt to a lower interest rate, but again, homeowners who have difficulty managing their personal finances may acquire more debt in the future and are also required to meet a higher mortgage amount, which can become unmanageable.

Advisers often suggest homeowners seek other repayment options when it comes to dealing with unsecured debts, like credit cards, and avoid using one’s home equity to pay down debts that have arisen from either credit cards or personal loans.  Yet, if cash-out refinancing is used, strict debt management practices are suggested to avoid troubles related to mortgage payments.