The Debt Adviser By Steve Bucci • Bankrate.com

Questions to ask before refinancing debt

Dear Debt Adviser:
I currently have 10 years left on my mortgage at 7.125 percent but also have high credit card debt. Should I refinance at a lower rate and take money out to pay off my credit cards (they average 11-12 percent)?
Thanks,
Art

Dear Art:
Thank you for asking a very timely question. Today millions of homeowners are busily putting themselves in increased jeopardy with home refinancing -- without understanding the consequences. As property values have risen and interest rates have declined there has been a rush to refinance to lower rates.

While refinancing, people are finding that they are eligible to borrow more than the original loan balance because the collateral for the loan, the house, has increased in value. So you can refinance a $100,000 loan at a lower rate, add tens of thousands of new debt to repay high interest credit and car loans, and end up with a much smaller payment. Great, right? Maybe not! Few people consider the consequences of fully leveraging a property if the value of that property should decline in the future and the house has to be sold for any reason.

To put it in simple terms, you are trading an unsecured debt, your credit card balances, for a secured debt, a refinanced mortgage. Refinancing your home to lower the amount of interest paid on your credit card debt is very tempting. However, you need to do a little homework before making that decision.

Below are some things you should consider before making the plunge into refinancing.

• For what amount is your home appraised and what percentage of the appraised value will you be borrowing against? Some lenders offer loans at 100 percent or higher of the appraised value of your home. I would caution against leveraging more than 80 percent of your home's value in a loan given today's high valuations. Should housing values decline, you could end up owing more than you can get for your home.
  
  
• How much money will you really save? Keep in mind that you may have costs associated with the loan, such as points and closing costs. Do the math using Bankrate's refinancing calculator and make sure the savings in credit card interest are more than total cost of the loan. One thing some people fail to calculate is the extended length of the home loan. You are paying less in interest per year, but if you take twice or three times as long to pay off the balance, you have eaten up a lot of those savings. Also, check the terms of your current loan and make sure you do not have a prepayment penalty included in the agreement.
  
  
• What will your life be like in five years? No one can answer definitively, but look ahead the best you can and determine if you believe you will stay in your current home for that period or longer. If you might be moving soon, you may want to reconsider refinancing. Something to keep in mind is that the current climate of company lay offs and downsizing means many people's employment is less stable.

Perhaps an alternative for you to consider would be to refinance the current mortgage balance you have to a lower rate, but do not include the card debt. Instead, use the money you save on each mortgage payment to pay down your cards faster! In this way you get out of debt sooner, but do not exposure your self to either over leveraging or paying for the dinner you charged to your Visa, for the next 30 years.