Get a new mortgage to pay card debt?

Dear Dr. Don,
We have a balance of $370,000 on our 30-year mortgage at 4.75 percent. We still have 25 years of the mortgage term to pay. I want to refinance the loan and take out about $50,000 of cash. That would likely mean a 30-year mortgage for about $420,000 at 3.8 percent. The cash would be used to pay debt arising from balances in two credit cards. I’m wondering if you think this is something I should do.

Thanks,
— Lillian Lever

View today’s best refi rates — lower your monthly payments

Dear Lillian,
It can make good financial sense to use a cash-out refinancing of your mortgage to pay down your credit card balances. That’s as long as you have sufficient equity in your home to use conventional financing and avoid private mortgage insurance.

Depending on your market, you may be limited to $417,000 for a conventional loan. That should be enough to pay off most of your credit card debt. Closing costs could run about $3,000.

I’m wondering how you expect to find a mortgage at 3.8 percent, well below the national average. How do you explain that?

There is a downside. You’ll be taking 30 years to pay for your past credit card spending and extending your mortgage by five years. The good news is that you’ll save some money as long as you don’t move anytime soon. Also, you need to be reasonably confident that you won’t run your credit card balances up again.

I’d advise that you engage in some financial soul searching about how you got to this point. Tapping your home equity to pay for your past consumption should not become a habit. Eventually, if you return to the well too many times, it will run dry.

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