Refinancing Your Home Mortgage to Pay Debt

Refinancing your mortgage means getting a new mortgage to pay off your current mortgage and borrowing more money to pay off debts. It allows you to pay off credit card debts, auto loans or other bills by adding what you owe into the new mortgage to get an overall lower monthly payment.

Pros

  • Although your mortgage payment might go up, your total monthly debt payments will decrease.
  • The credit card debts, automobile loans or other bills that you roll in to the mortgage will have a lower interest rate.
  • The interest you pay on the mortgage debt is, in most cases, tax deductible.

Cons

  • If you are behind on your mortgage payments, you may not be approved for the loan, or you will pay a higher interest rate than you would if you were current with your payments.
  • Without realizing it, you may end up with a mortgage payment you cannot afford.
  • If you are unable to make the payments, you could lose your home to foreclosure.
  • You may use up the equity in your home and have little or no profit if you choose to sell it.
  • You may end up owing more on your home than you can get if you sell it, especially when real estate commissions are taken into account.
  • This option is generally available only to those who have a good payment history on their current mortgage.

What to Avoid

  • Call three different lenders including the one that has your current mortgage. Some companies offer low-cost refinancing for existing customers.
  • From each of the lenders, request a “Good Faith Estimate,” which is an estimate of the cost of getting the loan. Compare the three quotes and question anything you do not fully understand.
  • Have the lender explain adjustable rates and fixed rates, how they work, and what your payment will be at the maximum rate.
  • A fixed-rate mortgage may be easier to budget for than an adjustable rate mortgage. Ask your lender for copies of the closing papers before the day you are to sign them. Hire a real estate lawyer or other professional that is not associated with the lender to explain to you anything that you do not completely understand.

What to Look for

  • The National Consumer Law Center warns you to “be suspicious of anyone that contacts you first” such as Internet, telephone or mail solicitations.
  • Avoid paying high closing costs to get the loan.
  • Avoid Adjustable Rate Mortgages that have high Margins. The payment may be low now (or fixed for 2 to 3 years) but will go up in the future. Make sure you know what the maximum monthly payment could be and that you can afford it.
  • Avoid borrowing more than you need. Rolling credit card debts into your home mortgage isn't always a good idea. Seeing your credit card balances at zero can be a temptation, especially if the underlying problem that created the credit card has not been fixed.

Potential Impact on Your Credit

Paying your mortgage as agreed is a positive on your credit but struggling with a new mortgage amount and being late on payments will have a negative effect. Having zero or very low balances on your credit cards will have a positive effect on your credit.