Should I Refinance My House to Pay Off Debt?

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Family Sitting in Front of HouseDesperate times require desperate measures or so the saying goes.  If you are struggling to pay your debts, primarily the result of the minimum payments on credit cards, medical bills, personal loans, taxes, student loans, etc., should you consider refinancing your home to pay off the debt?

There are several factors to consider. First, you must determine if you have any equity in your home that would allow you to refinance and take the excess proceeds to pay off your debt.  Unfortunately, with the downturn in the economy fewer and fewer people find they have equity in their home.  However, if you are one of the lucky ones that have equity in the home, you need to decide if consolidating the debts into the mortgage loan is your best option.  Is it always a bad idea to refinance your home to pay off debt, no, but you need to consider the pros and cons before you make the decision.

Pros:

The payment on the debt can be spread over the terms of a mortgage, often 30 years, therefore reducing the payment each month.

The interest rate on the mortgage is usually considerably less than what would be paid on credit cards, so there is an automatic savings.

The interest from the mortgage loan can be deducted on your taxes; interest on credit cards and most other personal debts cannot be deducted.  (Interest on student loans is the exception.  It can be deducted, but the deduction is limited and phased out as income reaches a threshold.)

You will be making one consolidated payment each month so there is a convenience factor.

This all sounds great, so why wouldn’t everyone just refinance their home to pay off their other debt.

Cons:

The monthly payment on the home mortgage is larger after refinancing and can be a stretch for the family budget.

If you are unable to make payments on the mortgage due to illness, loss of job, etc., the mortgage company can foreclose on the home.

Again, refinancing the home is not always a bad idea, but you must realize you have placed your largest asset, your “home”, at risk.