When Should You Refinance to Consolidate Credit Cards?

Refinancing your mortgage can do more than lower your interest rate. By taking a cash-out refinance for more money than you owe on your old mortgage, you acquire a sum of money you can use as you choose. One use for the money is to pay off your credit cards, leaving you with only one monthly payment. This can save you money, but it may not be as good a deal as it sounds.

Comparisons

Paying your mortgage lender instead of a number of credit-card companies produces multiple benefits. Mortgage interest rates are usually lower than credit card rates, the LendingTree website states, so you pay less and probably have a smaller monthly payment. In addition, you can deduct interest on the mortgage on your taxes, something you can't do with credit card bills. If you're unable to keep up your payments, on the other hand, your mortgage lender can foreclose on your house; credit card companies don't have that option.

Costs

When you refinance a mortgage, you trade the interest rate on your old mortgage for whatever's available in the current mortgage market. If rates have risen since you took out your original mortgage, a cash-out refinance means trading a lower mortgage rate for a higher one; the lower rate on your credit card debt may not make up for that. The Mortgage Loan website points out that lenders typically charge several thousand dollars to refinance a mortgage: If you can't afford that kind of expense, it's definitely not time to refinance.

Ratios

Mortgage lenders prefer that the mortgage only cover 80 percent of your home's value. If your home is currently appraised at $150,000, 80 percent would equal a $120,000 mortgage; if your original mortgage is at $115,000, you'd only be able to cash out for $5,000. With home values dropping in a number of areas, owners may have homes that are worth less than the original mortgage. If your home value won't allow you to cash out the money you need, this isn't the time to refinance.

Warning

The ideal time for a cash-out refinance is when mortgage rates are low and your home's value is high --- but cashing out still isn't a good idea for everyone. Homeowners may have a history of credit problems or compulsive spending --- if they don't change the underlying problems, consolidating their credit card debt frees up their cards so they can charge more debts. There's never a good time for someone with these patterns to do a cash-out refinance: The end result is more debt than ever.