If you’re stuck with a lot of debt, especially student loans or credit card debt, it can be really tempting to dip into your home equity to pay off your outstanding loans. But swapping your unsecured debt for more money owed on the mortgage can be risky business. Before you jump to refinance your home to pay off your debt, there are a few important things to consider.
First, refinancing can be a short term fix with long term consequences. Paying down your consumer debt could feel really good in the short term. But paying down the mortgage (and removing that financial burden for yourself or your children in the future) is one of the best moves you can make in the long term for you and your family’s financial security. It will take you much longer to repay your mortgage and your credit card debt if you add that debt to your mortgage balance since you are literally paying your credit card balance off over the entire duration of your mortgage. A paid-off house is almost like a retirement plan; you may want to only borrow from that equity if you have no other options or if you want to reinvest in your property.
Secondly, refinancing to pay off debt means you are converting unsecured debt (your credit card debt) to secured debt (your mortgage). Transferring this balance over to your home puts your house at greater risk - you’re putting the house up for collateral if you can’t pay off all your debt. Where the debt lies also matters if you were to file for bankruptcy. If you file for Chapter 7 or Chapter 13 bankruptcy, you can have some or all of your credit card debt eliminated. But if you plan to keep your home when you file for bankruptcy, your mortgage debt won’t be discharged.
Finally, a financial emergency or drop in the market could spell disaster if you owe more money on your house. What would happen if you lost your income or the housing market took a turn for the work? If you or your partner lose your jobs, you’ll be stuck with a presumably higher mortgage payment with few options to foot the bill. Similarly, if housing prices dropped, you would now have a bigger mortgage payment on a house that’s lost value.
So think twice before refinancing. Look at other debt repayment options or credit counseling services through a trusted non-profit organization.