Rolling unsecured credit card debt into a secured mortgage likely would lower your interest, but it increases the risk that you could lose your home if you can’t make your payments.
Among those considerations: Does refinancing make sense, and are you aware of the danger of rolling unsecured credit card debt into your secured home loan?
“Every person has different things they’re looking for and what they want to get from it,” says Rebecca Costanzo, a senior vice president at SunTrust Mortgage.
Better options to pay off your card debt often include balance transfer cards, which can give you a year or more at 0 interest to erase those mounting credit card bills.
But if you are weighing refinancing to clear your card debt, here is what you need to do and know:
Think long term and do the math
Refinancing your mortgage and rolling in your credit card debt may seem like a no-brainer when you compare interest rates. As of May 23, 2018, the average credit card interest rate on new card offers is 16.73 percent, according to CreditCards.com’s Weekly Rate Report, while the average 30-year fixed rate refinance is 4.52 percent, according to Bankrate.com.
It isn’t that simple, though. Paying off your card debt by rolling it into a home refinance could ultimately cost you more, experts warn.
Say you have 13 years left on your mortgage, and refinance to a 30-year loan to cover your mortgage and credit card debt, “the total amount of interest could be significantly more,” says Chris Dlugozima, an education specialist with GreenPath Financial Wellness.
If you have more than 20 years left on your mortgage and could refinance to a 15-year loan (average 15-year fixed rates are 3.8 percent), a refi that adds your card debt may be worth it, says Melinda Opperman, executive vice president of credit.org.
This type of refinance, known as a cash-out refinancing, typically requires that you have at least 20 percent equity in your home.
One obvious benefit: Having one monthly payment to keep track of certainly would be easier than mortgage and credit card bills, Costanzo says.
How much difference can a cash-out refinance make?
Below is an example of how much you can potentially save in monthly payments when you roll your credit card debt into a mortgage refinancing.
|Mortgage||$200,000 with 30-year fixed APR at 6.25%||$1,231.43|
|Credit cards||$30,000 at 15% paid off in 30 years||$379.33|
|Total monthly payments||360 monthly payments||$1,610.76|
|Mortgage||$230,000 with 30-year fixed APR at 4.52%|
|Total monthly payments||$1,165.38|
|Monthly payment difference after refinance||$445.38|
Notes about the calculations above:
1. This example assumes no additional charges are made to the card while paying off the debt. Additional charges could dramatically reduce the monthly payment difference.
2. This example focuses only on monthly payment savings. It doesn’t address costs associated with the closing of the refinancing or any other fees.
3. The above example assumes the $30,000 in credit card debt is paid off in 30 years. If you change the assumption to 10 years or 20 years, the difference in monthly payments will be even greater.
To calculate your savings from consolidating your card debt by refinancing, use Bankrate’s personal debt consolidation calculator.
Danger: Unsecured vs. secured debt
By refinancing your mortgage and taking extra money to cover your credit card debt, “you’re lumping in your unsecured debt with your assets,” says Thomas Nitzsche, spokesman for the nonprofit Money Management International.
What this means: Credit cards are unsecured debt. If you can’t pay your card balance, a lender generally cannot seize your assets. A mortgage is a secured loan and if you can’t pay, the lender has the right to foreclose on your home.
Here’s the danger: If you owe $150,000 on your home and refinance for $200,000 with the extra money going to pay credit card debt, your monthly payments would be higher. If at any point you got in a major financial crunch and couldn’t pay your mortgage, you could potentially lose your home.
My story: Would I refinance my home to get a load of cash?
Earlier this year I received a mailer offering $50,000 more than what I owe on my Tampa, Florida, home (in the above picture) to refinance my mortgage.
Then a solicitation from a company I’ve never heard of offered me $200,000 more than my home is worth.
The pitch in both cases? I could use that extra money however I wanted.
Why am I getting these refinancing offers? I suspect it’s because I live in a trendy Tampa neighborhood called Seminole Heights. Home values have been rising fast in recent years. Great restaurants and neighbors make this a great place to call home.
But would it be wise to refinance my cute two-bedroom home for 15-30 years to get a financial windfall that I could spend however I wanted?
In researching this story, I came to the conclusion that a cash-out refi wouldn’t be smart for me.
Yes, it might make financial sense, but if I had card debt to roll into the mortgage, I’d be worried that one day I couldn’t pay my monthly bill, and I’d lose my charming home. Paying off card debt now and losing my house later? That’s just too big of a risk for me to take.
Account for the extra costs of refinancing
Refinancing your home carries added costs, such as closing costs, an appraisal and title search fees, Costanzo says.
That could add several thousand dollars to your transaction. Factor these extra expenses in the equation of whether a refinancing makes sense for you.
“That means it will take time for the refi to pay for itself,” Opperman says.
How to pick a lender for your home loan
If you are considering refinancing your home and adding in extra to cover credit card debt, experts say be careful which company you choose.
If you have received a solicitation from a lender, “what is in front of us tends to be what we act on,” Costanzo says. But she recommends talking to multiple lenders and making sure you find one who understands your goals.
“A homeowner should select a lender that is upfront about the entire loan process, especially the requirements needed to get a loan, so there are no surprises,” says PK Parekh, vice president of home equity loans for Discover.
“It’s also important to find a lender that will provide a streamlined process and keep the homeowner informed along the way,” Parekh says.
Other options to pay off your card debt
Consider home equity financing: If you have equity in your home, you might consider a home equity loan or home equity line of credit.
Ask for a lower card APR: Call your card issuers. Our 2018 poll found that it’s easy to get rid of credit card fees if you ask. Among the poll findings: 56 percent who asked got a lower interest rate.
Seek credit counseling: Credit counseling services also can help by developing a plan to erase your debt in 60 months, Nitzsche says.
Apply for a balance transfer credit cards: Balance transfer cards give you breathing room of a year or more to pay off your card debt with no interest, Nitzsche says. Note that many balance transfer cards charge balance transfer fees, and you must pay off your debt before the 0 percent interest period ends or you’ll be paying even higher interest on your credit card debt.
Deal with the root cause of your debt
No matter which option you choose to pay off your debt, you don’t want to get in the red again.
Dlugozima suggests asking yourself if the root cause that caused you to run up credit card balances in the first place has been addressed.
“We want people with credit card debt to examine their financial behaviors and make meaningful changes for the long term,” Opperman says.
Refinancing your mortgage to cover credit card debt “is a quick fix that doesn’t set the borrower up for long-term success,” she says.