||Ask Dr. Don
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.
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
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