When credit card bills begin to stack up, some people consider borrowing money to consolidate the debt into a single monthly payment. One method of doing this is to refinance a mortgage and borrow extra money with which to pay off the credit card bills. While this strategy allows you to lower your overall monthly payments and consolidate your debt, you must make sure that you don't end up creating more financial problems in the end.
Consolidation Refinancing
Refinancing a mortgage is the process of taking out a new loan that pays off the existing mortgage. The new loan has its own interest rate, terms and repayment period, often resulting in savings compared to the original mortgage. A refinance loan can be taken out for more than the remaining balance of the mortgage, however, letting you pay additional bills such as overdue credit cards with the money as well. Once the original mortgage and other bills are paid with the borrowed money, all that remains is the single monthly payment of your new loan.
Deciding to Consolidate
Before you refinance your mortgage to pay off credit card bills, make sure that you can afford to do so. A mortgage refinance loan generally has out-of-pocket expenses associated with it, such as closing costs, that aren't included in the money being borrowed. You should also make sure that you have enough equity in your home to allow you to borrow enough to cover the cost of your credit card bills. Make sure that you can afford the new monthly payment as well, since there is a chance that it will be more than your current mortgage payment if you get a higher interest rate. Don't refinance if your property value has dropped, since you may not be able to borrow the additional money you need. You should also avoid refinancing if your current mortgage is less than a few years old or if you already have a second mortgage or home equity loan.
Managing Credit After Consolidation
Unless your credit cards were seriously delinquent or had been canceled before the consolidation, paying off your credit card bills with a refinanced mortgage frees up the credit lines on your cards. Avoid the temptation to begin using your credit freely to make purchases, since this behavior can quickly max out your credit cards again. You should pay off your credit cards with a refinanced mortgage to eliminate debt, not to give yourself an opportunity to accrue more debt and possibly end up behind on your credit card payments again.
Avoiding Predatory Lenders
One problem often encountered when trying to determine whether you should pay off credit card bills by refinancing a mortgage is predatory lending. Predatory lenders approach you and offer suggestions such as refinancing for consolidation purposes, often marketing their loan services aggressively and including the cost of additional items such as credit insurance in the loan amount. Many refinance loans offered by predatory lenders feature penalties for early repayment, resulting in you being fined if you try and pay the loan off early to avoid interest charges. If a lender seems to be pushing you too hard to consolidate, includes early repayment penalties in the loan agreements, or tries to get you to borrow more than you need, consult another lender to avoid what could be a costly refinance.
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