Is it a Good Idea to Consolidate Debt in a Mortgage Refinance?

Refinancing your house to consolidate your debt by paying off your credit card and other bills might sound appealing, but beware of the risks. You might trade several payments at high interest rates for one payment at lower interest, but that might not be your best choice. Consider carefully before paying off unsecured credit card debt with a loan that could put your home in jeopardy if you don't pay it off.

Taking Cash Out

Refinancing is not really consolidating your debts. You're taking cash out of the equity in your home to pay off your credit cards, but increasing the amount you owe on your home. If you owe $150,000 on a $200,000 home and take out $25,000 to pay off credit cards, you now owe $175,000 on your home. Your monthly payments on that loan will increase and you could lose your home if you default.

Short Term vs. Long Term Debt

You also are trading a debt which can be paid off at any time with one that carries interest for the life of the mortgage. Adding $25,000 on a 20-year mortgage means you'll pay interest on that amount for 20 years. Chances are you can pay your credit cards off sooner than that, even though they probably carry a higher interest rate than your mortgage.

Stop Other Debt

Refinancing to consolidate debt will be of no benefit if you don't stop the other debt. This means refraining to use your credit cards. It takes discipline to do this, but it is worth the effort. If you spend more than you can afford, consolidating your debt will not improve financial situation.

When It Makes Sense

Refinancing your mortgage to consolidate debt might work if you have a lot of equity in your home. This is especially true if it has increased in value since you bought it, you can easily afford the higher payments and don't increase the term of your mortgage. Refinancing might actually lower the amount you pay every month between your mortgage and credit card bills and improve your monthly cash flow. It might also be beneficial if you plan to sell your house within a few years and expect to make a profit.

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