Can A Mortgage Help Pay Off Credit Card Debt?

Credit card debt may accumulate to a point where you can't easily pay off the amount you owe. When this happens, you may have to take drastic action. If you have equity in your home, you may benefit from refinancing your mortgage and using your equity to pay off the credit card debt.

However, this has certain risks, with which you may not be comfortable.





Interest Rate

Finance professionals often recommend you start by paying off the debt with the highest interest rate and gradually work your way to the debts with lower interest rates. In most cases, credit card debts carry the highest interest rates. It may make sense to pay off your high-rate credit card debt with proceeds from a mortgage, which usually carries a low interest rate. Over time, this strategy may reduce your interest costs.
   
Reduce Debt Burden

If you have some equity in your home, you may get cash by refinancing your mortgage or getting a new home equity line of credit. For example, you still owe $100,000 and your home is now worth $200,000. Lenders may allow you to borrow $150,000 against your home. You may choose to use the
$100,000 to pay off the old mortgage and take the $50,000 as cash. The $50,000 may go toward paying off your credit card debt. This strategy may dramatically reduce your debt burden.
   
Costs

Getting a new mortgage loan may require you to pay high processing costs. Refinancing may cost thousands of dollars to process. For example, if you owe $20,000 in credit card debt and have to pay $3,000 to refinance, you will spend 15 percent of your credit card debt. This money can go toward paying off your credit card debt instead. While a home equity line of credit costs less to process, you must still come up with cash for the closing costs.
   
Risks

Because the new mortgage erases your credit card debt, you may be tempted to spend money using your credit card again. If you use a mortgage to pay off your credit card debt, you effectively convert the unsecured credit card debt into a secured debt -- your home loan. If you then can't afford to pay your mortgage, you may lose your home in a foreclosure. The Motley Fool website recommends that you continue to pay off your credit card bills regularly, at least until you pay off your mortgage.

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