Financial Experts - Refi to pay off credit cards, or leave loan balance?

8 Replies

Are there any financial experts out there who can answer this?

Is it better to refinance a house and increase the loan balance to pull equity out and pay off the business credit card balance... that is eating up monthly cash flow?

Or is it better to leave the loan balance where it is and keep paying the credit card bills (and interest) that were created when initial repairs were underestimated.

(The refi will be at a lower interest rate, creating a slightly lower monthly mortgage payment, but a higher mortgage balance.)

Any thoughts on this one?

...

@Barry Smith  

is the property that you are talking about rented out? If so, why would you not refi to pull cash out and pay off the credit cards? The renter will be paying the mortgage for you in this case allowing you to free up some cash. Depending on your interest rate for the credit cards, it is usually always best to pay those off since they usually come with much higher interest rates than do home loans. Also, it depends on what you are wanting to do. Are you looking for more cash on hand or do you want the property to be paid off as soon as possible?

If you are paying a lower interest rate  with a new mortgage than on your existing mortgage balance (win) and less interest on a mortgage than on your credit card balances (win) it seems like a good deal.

Also, you can deduct (for now) mortgage interest on your personal taxes.

The danger is people doing this and then "running up the debt" again.  According to Dave Ramsey, 78% of the time after someone consolidates his credit card debt, the debt grows back.

@Barry Smith  I'm not a financial expert by any means, but I think it all depends on the interest rates you are looking at. Like @Sam Elder  said above, if you can re-fi and have a lower rate than you are paying on your credit cards (which I assume would be the case), it would probably be a good idea to do so. The high interest debt is good to get rid of.

Thanks guys for your feedback.  Much appreciated.  The credit card debt was only created when initial repairs exceeded expectations.  The property is rented, and the refi rates are definitely significantly lower than the credit card rates. 

Pay-off the credit cards.  Here's some benefits:

  • Greater monthly cash on hand to save or invest
  • Interest on debt which was once non tax deductible is now tax deductible
  • Credit scores will increase after short time because of low (or zero) balance on other non mortgage credit products
  • Lower monthly debt obligations

I'm with the others, refi and pay off the credit cards.  One additional benefit I haven't seen mentioned is locking-in a long-term fixed rate. You could reasonably get a 5% rate which is fantastic when you look at historic rates and historic inflation.

@Barry Smith

Just to be a devil's advocate for once.

While agreeable on principle that get refi on lower rate versus credit card loan, credit card loans are in general much more negotiable to the lender.  You may potentially work out a payment plan (or even a discounted payoff) without involving your property.

The key is that credit cards are unsecured (ie. not tied to your property) debt and mortgages are secured, so credit card debts are much more negotiable.

Only if you cut up the cards.