Today we’re going to talk about refinancing your home to pay down debt.
You can either refinance with a cash out mortgage, or have the debt rolled into a new mortgage right at the closing table. I recommend doing it at closing, because they you aren’t faced with the temptation of being handed a big check, and you don’t have to wait while national security delays the funds that are added to your account.
Before I talk about what this is a good strategy, consider why every other guru calls it a bad one.
See, when you roll consumer debt into your house mortgage, you take a short term loan and convert it into a long term one. So your credit card, which is designed to be paid quickly, becomes designed to be paid over 30 years! That’s a long time to pay for those movie tickets you charged.
Now here’s how you do the strategy right, so it makes sense. Consider this…
Installment loans, like mortgatges, are better for your credit score than revolving loans, like credit cards.
Mortgage interest is usually tax deductible, credit card interest isn’t.
Mortgage interest, at around 7%, it much lower than credit card interest, at up to 32%
So, when you do this strategy to pay off high interest credit cards, them make the same payment to your new mortgage that you would be makeing to your current mortgage plus all of the credit cards… more of the money will be going to pay down principle instead of to interest payments.
If you have equity in your home, this strategy could save you thousands of dollars in interest a year.
Here are the traps that most people fall into when implementing this strategy.
#1- they go back to using their credit cards and run up the balance again. Do not, I repeat, do NOT do this until your mortgage balance is back to what your original mortgage balance was before you started this strategy. Remember, you’re doing this to get out of debt, lower your interest rate, and raise your credit score. Making new charges on your account won’t help those goals.
#2- they make only the new mortgage payment, not the total of the old mortgage payment plus the minimum payment that was on all of the consolidated cards. This is crucial to making this strategy work. You’ve got to be paying off MORE than the minimum payment on the mortgage.
Provided you avoid these pitfalls, this in an excellent and sound strategy to pay down your debt, increase your credit score, and lower your interest payments… all with a refinanced cash out mortgage
One Response to “Refinancing your home to pay down debt”
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Dear Donna:
I attended your Credit Millionaire bootcamp in Nashville last December. However, I seemed to have been off your mailing list since then.
Very glad to hear from you again and I learned quite a bid from your website.
With best wishes,
Rita Mak
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