Not all debts are the same. Some debts are unsecured (i.e. credit card debt) while some debts are secured (i.e. mortgages). Most people think of a mortgage as “good” debt because as you pay this debt down, you are increasing your net worth because the equity in your home is increasing. Furthermore, a mortgage is a debt that has a purpose — to provide a home for you and for your family.
On the other hand, credit card debt is usually viewed as “bad debt.” While you can purchase items using your credit card (i.e. television, clothing, etc.), these items typically wear out and decrease in value. Credit cards are also used to pay for items that you may not be able to afford without using credit; therefore, it is easy to live above your current means and get into financial trouble.
When a person gets into financial trouble because of credit card debt, he or she may try to resolve their debt problems by refinancing their mortgage to pay off the credit card debt. This may seem like a good idea because it gets rid of the credit card debts, stops creditor harassment, and reduces the number of bills the person must pay each month. Unfortunately, refinancing your mortgage to pay credit card debt is never a good idea for several reasons.
Reasons Why Refinancing a Mortgage to Pay Credit Card Debt is a Bad Idea
- Unsecured Debt Is Converted To Secured Debt – Credit card debt is unsecured, meaning that the debt is not secured by collateral. If you do not pay your credit card debt, the creditor cannot foreclose on your home. The company must file a collection lawsuit to try to collect this money. However, if you do not pay your mortgage, the lender will foreclose on your home. By refinancing your mortgage to pay off debt, you’re taking unsecured debt and converting it to secured debt and risking your home in the process.
- It Damages Your Credit Score — Refinancing your mortgage to pay off credit card debt can lower your credit score in several ways. One element of your credit score is the length of time your accounts have been open. Paying off and then closing an account may shorten the average age of accounts. Another element used to calculate your credit score is the various types of debt you owe. Refinancing your mortgage to pay off credit card debt limits the type of debt you have open. Finally, a new inquiry is made on your credit report when you refinance your mortgage, which can damage your credit score.
- It Makes It Harder To Sell Your Home – If you decide to sell your home, the payoff of your mortgage is higher due to the credit card debt; therefore, you need to sell the home for a higher price in order to cover your closing costs and mortgage payoff. This may make it more difficult to find a buyer and it reduces the net amount you will receive from the sale.
- Refinancing Your Mortgage to Pay Credit Card Debt Can Be Expensive — If you choose to refinance your mortgage to get rid of your credit card debt, you are paying money to get money. Closing costs (i.e. attorney fees, mortgage fees, etc.) can be quite expensive. Depending on the lender, you could pay an amount equal to 3% or more of your new mortgage amount. Therefore, instead of paying $3,000 to $6,000 toward paying down your debt, you are paying the mortgage company to keep your debt amount the same or possibly higher.
A Better Way to Deal with Credit Card Debt
Refinancing your mortgage to pay off credit card debt is not the best way to deal with your debt problems. Bankruptcy allows you to eliminate your credit card debt without increasing your secured debt or risking your home. If you qualify for a Chapter 7 bankruptcy case, you can wipe out your credit card debt in about four to six months. Even for individuals who must file under Chapter 13, bankruptcy is still a better option to rid of credit card debt compared to refinancing your mortgage.
If you are experiencing unmanageable credit card debt and are looking for a way to pay it off, take some time to read our Debt Solutions Comparison Chart. If you still are unable to decide the best option for you, take advantage of a free bankruptcy consultation and an experienced bankruptcy attorney will help you decide the best option for your situation.
