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Ask Dr. Don

Cash-out refinancing

Dear Dr. Don,
I'm in the process of refinancing a 30-year mortgage to 15 years at 5.375 percent. The current loan balance is $50,000. I would like to pay all of our debts.

Is it wise to borrow more money to pay off the credit card debt? Or is it better to just refinance to a lower interest rate/shorter loan term? Please help.
Thank you,
Zita Zillion

Dear Zita,
Using a cash-out refinancing to pay off your credit card debt can make sense financially, but there are some potential pitfalls. You aren't paying off your debts; you're just restructuring them.

You would be converting unsecured credit card debt into secured mortgage debt. Creditors can hound you when you don't pay your credit card bills, but they can foreclose on your home when you don't pay your mortgage.

Another problem with this approach is that you're taking 15 years to repay what was meant to be a short-term loan.

The advantage to using mortgage debt to repay your credit card debt is that the interest rate is lower, and you may be able to deduct the mortgage interest expense on your taxes. But if you take three times as long to pay the bill, the interest savings evaporate.

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The temptation to keep using your credit cards once you've freed up the credit lines can be really strong. You may not have the discipline to control your spending. Tapping your home's equity to pay down your credit cards isn't something that you want to do on a regular basis. The key is to live within your means.

Read the Bankrate feature to learn more about cash-out refinancing and consider a home equity loan as an alternative before deciding what approach to take in restructuring your debt.

-- Posted: Aug. 16, 2002

Read more Dr. Don columns
See Also
Living below your means
Cash-out refinancing vs. home equity loans
Financial advice glossary
More Dr. Don stories


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