Is Home Refinance better than Debt Consolidation?

Many clients have this simple question: Home Refinance or Debt Consolidation?

Many people concerned with debt have come to a crossroad to initiate a Home Refinance to Refinance Their Home with a Home Equity Line of Credit and cash money out of their equity to pay off bills or enroll in a Debt Consolidation Program. The dilemma is becoming more prevalent and as a non-profit organization in business since 1997 we remain objective and evaluate the situation.

Here is the Home Refinance vs Debt Consolidation Situation:

You are in credit card debt, more than you can handle. You own a home. You are thinking of a Home Refinance your home to pay the debt off.  Like many people, you take to the internet and search like crazy for advice.  Unfortunately the advice is often biased; Mortgage Companies, Refinance Companies, and Home Equity Loan Companies' websites are saying its a great idea, credit counseling and debt consolidation companies are saying its not.  Who do you believe?  Below you will find a simple answer.

Don't Refinance Your Home.

Here's why:

Credit card debt is "unsecured", meaning there is nothing that you own that is attached to it.  Default balances on credit card debt are not recoverable by your assets, and the rate can be as high as 30% or more. If, starting this morning, you made the decision to never pay another credit card bill ever again as long as you lived, the cost of this would amount to the grand sum total of of $0.00.

A Home Mortgage, on the other hand is "secured", much like a car payment.  The house and property that you live in is attached to the Home Mortgage you have.  Default balances on mortgage debt are recoverable by your assets (the same house in question).  If, starting this morning, you made the decision to not pay your mortgage-the cost of this would be to Forfeit your Home.

It makes very little sense to take "unsecured" debt and convert it into "secured debt" by refinancing your home to pay off credit card debt.  If you don't already know, the front end payments made on a mortgage are comprised mostly of interest payments, it is only towards the last half of your mortgage term that you start to build some real equity.  So if you were to take credit card balances which have already been accruing high interest rates and roll them into a new mortgage payment, you actually will wind up paying more than 4 times what the original balance was before you consolidated it.   

Simple huh?

Here is a Home Mortgage vs Debt Consolidation Scenario with some real life numbers:

John and Jane Smith own a home that they bought for $300,000 10 years ago.  They have a 30 year rate locked in at 5.75% They have monthly home mortgage payments of $1,750 per month.  They also have $35,000 in unsecured debt from various credit cards.  As of today, the balance remaining on their mortgage is $255,302. This gives them an equity of $44,698.  Let's say their home went up in value 25%.  They now have a combined equity of $225,000.   With a decent rate on a 15 year home equity loan (or home equity line of credit) of 8% for $42,000 ($35,000 in credit cards, (plus $7k for closing costs), they would have a combined monthly mortgage payment (1st and 2nd) of $2,163 and they would be paying a total amount of $32,358 in Home Mortgage Interest on the second mortgage.

Debt Payments vs Interest Payments

If John and Jane decided to enroll their $35,000 in unsecured debt into a credit counseling program they would pay roughly $510 per month and be debt free in about 4.5 years.  The total interest charged to them over the course of the program would be about $8,060, saving them $24,088.  But the best part is they NEVER tapped into their equity.

Talk to a Debt Consolidation Expert

When you sit down with any unbiased financial advisor to discuss options of getting out of credit card debt, they will not only be looking at your financial situation as it is today, but how it will be next year, in five years, or even ten years down the line.  One thing that rarely changes, regardless of economic and housing market fluctuations, is the fact that our home values will continue to rise over the long haul.  By constantly cashing out our most valuable asset - equity,  is to deny ourselves of the American Dream.

Other Creative Mortgage, Equity and Debt Ideas

There are other creative ways to handle credit card debt without tapping into the our most valuable resource, our equity.  Taking a long hard look at our personal and household budget can usually help alleviate the burden.  Smaller, unsecured signature loans are also an option.  So is taking a part time job for a time.  Almost everyone can find 10-15% of extra income with an honest look at some lifestyle changes.If you have come to the fork in the road trying to decide if you should opt for a Home Refinance or Debt Consolidation, talk to a Professional non-profit Debt Management firm. If you want more information, complete the form below, we will send you free no obligation information about Debt Consolidation.

Home Refinance vs Debt Consolidation

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