12/03/2008

Is It Worth (& Smart) To Refinance Your Mortgage To Pay Off High Interest Credit Card Debt?

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We all get that dreaded phone call during dinner at some time or another. It’s a mortgage company calling to see if we want to refinance our home and take out cash to pay off debt. If you are like the average American family, then no doubt you have a substantial amount of credit card debt.  The average in this country is $8,500.00 however a large percentage of families carry substantially more.  So the question comes to the fore, is it really worth it to allow someone to refinance your home in order to pay off all your credit card debt?

Well to begin you need to look at the interest you will pay on your mortgage versus your credit card.  With many people paying upwards of 15% on their credit cards each month versus the 6-8% for a typical home loan, initially it seems that you would be better off going with the refinance option than sticking with the credit cards. But keep in mind that the money you take out of your home in the form of a cash equity to pay off your credit cards will be amortized or spread out over usually 30 years. That is a lot of compounded interest you will need to pay. Not to mention most people refinance their home several times, so that 30 year figure can be stretched out even farther making the overall interest you pay higher.

Therefore some basic questions should steer the average person in the right direction. Such as:

  • How long do I plan to live in this house?
  • Do I plan to pay it off and if so how long will it take me.
  • What interest rate am I paying on my credit cards and again do I plan on paying them off anytime soon?

Once you have a clear answer to these questions, you can use readily available credit card and mortgage calculators to calculate how much interest you will pay over a certain amount of time. Then you can compare those amounts and also take into consideration the upfront costs on refinancing which are typically at least 2% of the loan amount.   It’s only when you are armed with this information you can make a rational and informed decision.

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Sponsored by:

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By Steve Borrelli from Sterling Home Mortgage

Photo Credits: (Bill and Mavis) - B&M Photography (cc)

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September 4, 2008 | Filed Under Credit Cards, Debt Management, Low Interest Credit Cards, MasterCard, Mortgage, News |  

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