Certain homeowners have turned to various refinancing options as a way to use their home’s equity to manage unsecured debts, but there are some who feel that this practice may not be helpful, especially if a homeowner may have poor financial habits. Essentially, homeowners who had equity in their home have used a cash-out refinancing option as a way to access capital, and possibly refinance to a more affordable interest rate on their mortgage at the same time.
The way that this has been beneficial for some homeowners over the past months is that homeowners who have been able to refinance for a more affordable rate on their home loan and access capital from their equity have used this money to pay down expenses like credit cards or personal loans. However, cash-out refinancing essentially attaches these forms of debt, which are usually unsecured debts, onto a secured home loan, which will obviously necessitate that a homeowner repay a higher amount on their mortgage.
When used properly in certain cases, homeowners have been able to erase various debt sources, that also come with multiple interest rates, and simply put themselves in a position where they can focus as much money as possible towards paying down their mortgage, which now has these other debts attached. While cash-out refinancing truly doesn’t erase debt, but simply consolidates it onto a mortgage, financial advisers often caution homeowners about using this type of refinancing for debt repayment purposes, as homeowners who get behind on their mortgage payment stand to lose a great deal.
Many of the concerns that are associated with this type of refinancing comes in the form of homeowners being unable to manage unsecured debts. If, for example, a homeowner allows credit card debt to get out of control and they then attach this debt to their home loan, there is usually a lower interest rate associated, since mortgage rates are typically lower than many credit card rates, but poor financial practices may lead a homeowner to more debt or trouble meeting this higher mortgage amount.
While homeowners who may have negative equity or not enough equity in their home to combat various debt sources will be unable to use this type of refinancing, for successful homeowners who have turned to cash-out refinancing, strict budgeting and saving practices have been implemented in order to allow them to avoid acquiring more debt from unsecured sources like credit cards and has put them in a position where they can focus money towards their mortgage so that they will not fall behind in their payments.