Mortgage Refinancing To Erase Personal Unsecured Debts–Can Using A Home’s Equity Benefit Troubled Homeowners?

In 2010, many homeowners took advantage of low mortgage interest rates as a way to erase various personal debts which may have come from unsecured sources, by essentially consolidating these debts and grouping them in with one’s home loan obligations. Homeowners were able to benefit from refinancing to erase personal unsecured debts due to the fact that their home’s equity allowed them to use a method known as cash-out refinancing to assist homeowners who may have had trouble meeting all of their monthly payments on various debts.

Homeowners would ideally be able to refinance their home loan and get money back from their home’s equity, which would create a higher amount of debt they owed on their home loan, but would allow them to erase unsecured debts, like credit cards, and essentially apply these principles amounts to a much lower interest rate. Then, if homeowners properly used cash-out refinancing to their benefit, these individuals could focus their repayment strategies on simply lowering their mortgage as they were no longer obligated to pay various debts aside from their home loan.

However, homeowners may now face problems when it comes to using refinancing as a way to erase their debts as, both old problems and new housing issues may create difficulties for those who wish to use their home’s equity as a way to erase personal debts. One example of problems that have arisen is the fact that many homes have lost value and, for some, homeowners would no longer have equity on which they can draw the funds needed to erase their debts.

The fall of home prices is obviously something that many homeowners are struggling from as it’s estimated around 30% of homeowners are in a negative equity situation. Yet, there have also been interest rate increases that may prevent homeowners from gaining the affordability they need from refinancing, as a homeowner who cannot acquire a lower interest rate when they refinance using this cash-out option will not be in an advantageous position when it comes to repaying these debts.

Another issue is that homeowners have faced is simply the cost of refinancing. Some homeowners may be able to refinance their home loan, receive cash back from their homes equity, and get a lower rate as a result of refinancing, which could offer lower overall costs when it comes to repaying their mortgage after consolidating unsecured debts, but closing costs have simply been beyond a homeowner’s means to pay and, as a result, may have offset any benefits gained from this refinancing option. While homeowners are still looking for ways to make their personal financial obligations more affordable, these issues need to be weighed when homeowners are considering using their mortgage to erase their debts as negative equity, interest rates, the ability to repay a higher mortgage obligation, and overall costs may prevent homeowners from benefiting from the use of refinancing and equity to erase unsecured debts.