Are you drowning in credit card debt while you are sitting on a lot of equity? With credit card interest rates often pushing the 20% range, there is undoubtedly a temptation to refinance your home to pay off debt. Low mortgage rates make refinancing an attractive alternative.
If your mortgage is up for renewal and rates are lower anyway, paying off high-interest debts can have its benefits. Your credit score will jump up as the credit bureau considers payment in full a good sign that you are handling your credit well.
Like all decisions, you need to consider both sides of the argument. Certainly, you feel relief when you no longer need to avoid your credit card statements, but refinancing has other consequences. Consider these things if you are thinking of using your equity to ease credit card strain.
If you are contemplating using your home to pay off your credit cards, remember that your mortgage balance will increase. While you will be paying a far lower interest rate than with your credit cards, this means that you will have less equity if you decide to sell. Equity is the cash money that is available after you pay off your mortgage.
Borrowing against your property is not free money. You still own the home so the loan is repayable. Even though interest rates are lower on a mortgage, you pay interest on the total amount that you borrow and your balance goes up. The result is higher payments.
For example, if your mortgage balance is $100,000 and the market value is $400,000, then you have $300,000 in equity to work with. If you decide to borrow $50,000 to pay off your credit card debt, you now have a $150,000 mortgage and only $250,000 in equity. Your mortgage payments will roughly be another half as much again as what you pay now. This situation is acceptable for those of you that can handle these higher payments.
Using the equity in your home to pay off debt can certainly help you sleep better at night and give you a fresh start. The only problem is that if your spending habits do not change, you will be in the same situation again quickly. Then you face a higher mortgage balance and credit card debt again – double the debt.
Before resorting to refinancing to manage your debt, consider whether you have the self-control to manage your credit cards when they are at a zero balance again. If you are not willing to stop abusing your credit cards the situation will repeat itself. Perhaps credit counselling would be a good first step to help you curb your impulsive spending habits.
Real Estate Market
Equity measures the fair market value of your property against the balance owing on your mortgage. As we do not know what the real estate market is going to do, you can only guess whether borrowing against your equity is wise. Research into the current market is reasonable, but not an iron clad guaranty that your home will be worth as much as it is today.
If you borrow against your property, the possibility always exists that the market may drop and your home value with it. Some homeowners borrow so much against their equity that they end up owing more than their home is worth.
Speak to a Professional To Get Your Options
Clearly, there are many factors to consider if you want to use your equity to pay off your credit card debt. Each individual’s financial situation is different and what is risky for one is acceptable for another. If you do decide that you want to take advantage of our lower mortgage rates, you can talk with one of our mortgage professionals today. We can help you find a product that suits your needs as they have access to many products and lenders.