Should You Refinance Your Home to Pay Credit Card Debt?

Using a Home Finance as a Financial Planning Tool

I have approximately 5 credit cards with a total of $44,000.00 in debt on them. The rates on these cards range from 1.9% to 2.9% for the life of the loans on the cards.

I have recently applied to refinance my home that I owe $272,000.00 on and is worth about $520,000.00. I got a 5.63% locked 3 year ARM as I project to sell this property within 1 to 2 years.

I have owned it for 2.5 years already.

My question is was this smart to do as I only refinanced enough to relieve me of the credit card debt. Hopefully this will then raise my credit score above the 730 it is at now, so when I do sell I will then be in a better position for lower interest rates and so on.

As I am not a fan of borrowing my own money that would be tax free after selling the property, I did want to wipe out the extra debt I had. It is now $44,000.00 owed at a higher rate, but it will only be for a short time and it over-all lowered my monthly payments of cash for debt for now.

So was this smart to do and get rid of the debt even though they were very low interest rated cards or should I of just toughed it out for another year or so and collected on all the extra profit tax free after selling the property and then pay off all my existing credit card debt.

My payment went from $1333.00 to $1663.00 but with the $1333.00 I also had to pay about another $1700.00 in credit debt on top of that. Now I just have to pay the $1663.00 but well be out a extra $87,000.00 when I sell the property and that is $6,000.00 short of the actual cash I had to put down on the house to get the stated income loan I was after.

The house was sold to me for $342,000.00 and I just refinanced for $360,000.00 with the approximate value of homes in this area selling for $540,000.00 in the low range of the spectrum. Three just sold with in the last month in this range and above, and two of them were smaller than this property.

So I guess after all this babbling on and on. Was this a good thing to do or a wrong thing to do?

Thank you for your time and look forward to some answers.

Andrew

---

Taking short term unsecured debt and converting it into long term secured debt is never a very good idea. However in your case you plan to sell within a few years and in the meantime the interest is tax deductible.

It seems like you have plenty of equity in your house. I don't understand how you calculated you will come be out $87,000 or that you will receive less than the money you put in the house. If you sell for $520,000 and owe $360,000 it seems that your profit will be $160,000 before taxes and fees.

I would be sure to invest the almost $1400 a month you are saving in a good stock mutual fund. I would also cut up the credit cards and close the accounts and live on cash from now on. The major downfall from a debt consolidation loan for most people is that they consider themselves newly rich and just run their debt back up to where it was or even more - in addition to their new mortgage.

I don't think I would have done it the way you have. For one thing a refinance generally carries closing costs that wipe out more savings than you might realize in the short run. But if you are careful everything should work out fine.

  | Top | Questions | Home |