If your mortgage is up for renewal and you are drowning in revolving debt, you may find yourself in a real financial jam. Before you dig yourself deeper into debt or start missing payments, consider refinancing your mortgage to pay off credit cards.
What is refinancing?
Mortgage refinancing is when you take out a new mortgage on your home to replace your existing mortgage. You have the option to convert your mortgage from variable to fixed (and vice versa) and if possible, take advantage of a lower interest rate. Through refinancing, you can also roll your credit card debt into your monthly mortgage payments.
What are the benefits of paying off high-interest debt via refinancing?
The most important benefit of refinancing to pay off your credit cards is the lower interest rate. Credit cards come with very high interest rates. Many Canadians don’t realize that their cards carry such astronomical rates and would be better off with refinancing.
When you refinance and your credit card debt is rolled into your monthly mortgage payment, you are eliminating making multiple payments to every debt source. Refinancing equals one payment, helping you better budget for the future.
What are the drawbacks of refinancing to pay off credit cards?
When you refinance your mortgage to pay off your credit cards, your mortgage balance increases. You now have to pay back even more money than you first took out when you got your original mortgage. This means that although you will not be paying high interest on your credit cards anymore, you still have to continue to pay off your mortgage so it is also important to ensure that your budget can afford the higher payments or a refinance will only put a Band-Aid on a larger problem.
Furthermore, you will lose some of the equity in your home which could affect your property’s selling price, should you ever decide to sell. Your home’s market value can increase or decrease, depending on the amount of equity found within in. The more you borrow from the home, the less equity you have.
Is credit consolidation a better option?
While the two are quite similar, credit consolidation does not need to involve your mortgage. With credit consolidation you are rolling all your credit card debt into one monthly payment, instead of rolling it in with your mortgage. It really depends on the individual’s situation, credit rating, and the amount you are looking to pay off.
For those who are thinking of refinancing to pay off their credit cards, it is important to talk to a financial counsellor. At Kevin Thatcher & Associates, we can help you better understand the advantages and disadvantages of refinancing and see if it’s the right option for you.