Wednesday, December 13, 2006

Refinance to pay off Credit Card Debt - No Way!

There's always been so much talk about using a cash-out refinance to pay off credit card debt. I've always believed that this was a Bad Idea. But with Christmas right around the corner the temptation to do this is even stronger, and refinancing to pay off credit card debt after Christmas is an even Bigger Bad Idea.

Why? Because...
  • you will charge more for Christmas knowing that the debt will be consolidated (you tell yourself that with a cash-out refinance the credit card debt is paid off. But it's still there - added to your mortgage)

  • you will actually pay just as much, if not more, for the credit card debt - even if you refinance at a lower interest rate - because you will take longer to pay it off (Home Equity is your nest egg...)

  • credit card debt is unsecured. If you default on your credit cards (don't pay them) creditors can hound you, but they can't foreclose on your home. If you move that debt into your mortgage you are securing the debt, and if you default the mortgage company will take your home (cash-out refinancing).

  • a cash-out refinance costs money (loan origination, closing costs, etc). If you can come up with cash to refinance, why not use that toward your debt? If you can't come up with cash, are you going to add the closing costs to the loan? If so, you are adding debt onto your debt to pay off your debt. (Sounds rediculous, doesn't it.)

  • home equity is your nest egg. It's your security during a time - your retirement - when you have little or no ability to create income. Find other ways to pay for the things you want now (like Christmas gifts), while you are young and strong and able to make money.

  • if you cash out more than 80% of your homes value, you will pay PMI (private mortgage insurance). PMI will offset the savings you hoped to gain by refinancing (Understanding cash-out...).

  • if you have substantial credit card debt, you are more than likely NOT managing your money well. Do you really think that paying off your credit card debt will stop you from charging again? If you are considering a cash-out refinance because you want to spend more than you have for Christmas, you will more than likely end up with new credit card debt - and be in far worse shape than you are right now!
Using a cash-out refinance is Bad Idea. Using a cash-out refinance to pay for Christmas is an even Bigger Bad Idea. Don't you agree.