Credit card debt has become a menace in the U.S. Statistics reveal that an average American family has approximately $9300 in credit card debt. Most Americans have
developed a poor spending habit which they just can’t break. With the help of plastic cards people buy what they cannot repay and eventually fall behind their payments.The high interest rate along with the late fees pushes them towards debt and compels them to consider options like credit card debt consolidation.
With the credit card company harassing you for payments, the situation can get quite out of control. So, how would you get out of such a crisis? Well, refinancing your home to clear the debt can be a convenient option.
If you are a home owner and suffocating under credit card debt then you might consider refinancing your mortgage to get the required cash and pay off the credit card debt.
However, there are certain advantages and disadvantages of this option. Let’s discuss them in detail.
Know the advantages
1. You would get time to get back to your feet. With refinancing the mortgage, your
credit card debt will turn into secured debt. You would need to clear this debt over
a relatively long period of time (possibly 15-30 years).
2. Your monthly payments would be considerably reduced. The affordable payments
would reduce your stress substantially.
3. If you manage to make regular payments over a long period of time then your
credit score will improve. In fact, you would be able to repair the damage caused
by the late payments.
Know the disadvantages
1. Refinancing your mortgage can be a risky proposition. Since the collateral is
your house, defaulting on the loan would lead to loss of home. So you should be
confident about making the payments on time.
2. During financial depression, it might be difficult to sale your house for what it is
worth. The appraisal price can actually be deceiving and when you actually try to
sell the house, you might be shocked. It is possible that no one might offer you
that price. If the price of the house is less than what you owe to your creditors
then it might not be a smart idea to refinance your mortgage in order to pay back
credit card debt. This is because you would only be able to pay of your debt
partially. Consequently, you would need to payments towards the mortgage debt
as well as the credit card debt. This would make things tougher for you.
3. Finally, refinancing usually involves paying closing costs which can be quite
high.
HELOC: another convenient option
You might also want to consider a HELOC (home equity line of credit) to payoff your
credit card debt. Here, you can apply for a certain sum of money based on the equity in
your home. The interest on a HELOC will be much less than that on credit cards. Also,
HELOCs have a lower closing cost compared to refinancing.
Refinancing your home will be a smart idea if the money you get is enough to eliminate your credit card debt. It is somewhat like a debt consolidation loan. The difference lies in the fact that refinancing is secured through mortgage
Debt consolidation can be from multiple unsecured loans into one unsecured loan, but more commonly it involves a secured loan against an asset, usually a house. In this situation, a mortgage is secured against the house. Providing collateral against the loan allows for a lower interest rate than an unsecured loan, because by backing the loan with an asset (collateral), the asset owner agrees to allow the foreclosure of the asset to pay back the loan. The risk to the lender is reduced, so the offered interest rate is lower.
ReplyDeleteknowledge closet
That's great when you want to vbecause it can gives you a new mortgage with a lower interest rate and say goodbye to the credit card that can cause you head ache
ReplyDeleteIf you are a home owner you should know how long you want to dwell in your home and have it all mapped for the future.......this can really save you large amounts of money, PERIOD !
ReplyDeleteHome loan refinance