Sometimes even the most responsible spenders find themselves with credit card debt hanging over their heads. This is especially applicable nowadays, as many people faced unforeseen expenses or saw their income suffer during the pandemic.
If you have a stubborn credit card balance that you just can’t get rid of and costs you a lot of money in interest, you have several options for paying it off. You can make a balance transfer and transfer that balance to a new card with a lower interest rate. Or you can take out a personal loan, use it to pay off your credit cards, and then pay off that loan at a lower rate.
But if you’re a homeowner, there’s another option worth considering – cash refinancing.
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How Your Home Could Help You Get Rid of Your Unhealthy Debt
When you refinance a mortgage, you are replacing your existing home loan with a new one on better terms. Usually, that means getting a mortgage with a lower interest rate, as that can lower your monthly payments as well.
Many homeowners do a standard refinance, where they take out a new loan equal to their existing mortgage balance. But there is also the option of refinancing in cash, which allows you to borrow more than what you owe on your current mortgage. And that decision could be your ticket to getting rid of credit card debt.
Suppose you own a house worth $ 300,000 and you owe $ 220,000 on your mortgage. Let’s also assume that you have $ 15,000 in credit card debt.
With cash-out refinancing, you would trade in your current home loan for a new one in the amount of $ 235,000. The first $ 220,000 would be used to pay off your current loan, and the remaining $ 15,000 could then be used to pay off your credit card balance. You would then simply pay off your larger home loan in one payment each month.
To be clear, when you do withdrawal refinance to pay off a credit card balance, you are swapping one type of debt for another. But because refinance rates are so competitive these days, you can save a world of money if you go this route.
Imagine that your credit cards charge you an average interest rate of 18% on that $ 15,000 balance. The average refinance rate at the time of this writing for a 30-year fixed mortgage is 3.257%. And you’d be much better off paying off that debt at just over 3% interest than at 18%.
Use your home to your advantage
The longer you keep a credit card balance, the more likely you are to accumulate interest and the more likely you are to damage your credit score. If you have the option of refinancing with withdrawal, it is worth considering if you are sitting on credit card debt.
Not only could a cash refinance be your solution to making this debt more affordable to pay off, it could also lower your housing costs. And that, in turn, could free up enough money that you’re less likely to have to use your credit cards again.