Whipping out that slice of plastic gets you and your sweetie a trip to Hawaii, a dinner at your favorite bistro or a massage at a day spa. That credit card convenience comes with a price of high interest rates and fees. Even if you easily make the minimum payments every month it might be time to pay off those cards.
It's difficult to obtain a first mortgage that gives you enough money to pay off credit card debt. Before the loan is approved, the house must be appraised. The contract with the mortgage lender usually says that the loan will be the sales price or the appraisal, whichever is lower. What this means is if the appraisal is higher than the sales price, you have instant equity. What it doesn't mean is that you get the extra cash because the lender increases the loan amount.
If your home has appreciated in value, or if you've paid down the original mortgage so there's more than 20 percent equity in the home, it's possible to refinance the home with a new mortgage and have additional cash. For example, assume you bought the house for $250,000, the value is now $325,000 and the current loan amount is $200,000. If you refinance the home for $260,000 -- 80 percent of the value -- you would have $60,000 to pay off your credit cards, for home improvement, or for savings.
Second Mortgage or Home Equity Line of Credit
A second mortgage or home equity line of credit is based on the appraised value of the home. It is secured on your home in second position behind the first mortgage. In other words, when the home is sold, the first mortgage gets paid first and the HELOC second. The proceeds of the HELOC can be used to pay off credit cards. If you haven't drawn down the entire credit line and the value of your home decreases, the HELOC can be decreased to reflect the decrease in the home's value. If you default on the HELOC, you may lose your home through foreclosure.
Once you've paid down the credit cards, you may be tempted to start charging again. If that's the case, put the cards in a lock box or other safe place where they're out of sight and out of mind. Don't close older accounts as it may decrease your credit scores. Your credit score is based in part on how long you've had credit and your used credit as a ratio to available credit.
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