With growing consumer debts, should consumers refinance their mortgages to pay off debts?
Between the increased amount of debt that weighs upon many consumers and the declining interest rates on mortgages, many people have considered refinancing their homes to pay off some of that debt.
By refinancing, they replace their old mortgage with a new one that has a lower interest rate. This helps to reduce their monthly payments, allowing them to pay more towards other types of debt. A refinance can also be considered as a cash-out option, where consumers borrow against their home’s equity.
There are several advantages of doing this. Interest rates on today’s mortgages are much lower than those on credit cards, allowing consumers to pay off their high-interest debts and reduce their overall combined debt interest rate by several points. Another advantage is that the interest paid on mortgages can be deducted from personal tax returns, while the interest on other types of debt cannot.
There are, however, downsides to refinancing. If a consumer pays off credit cards using the money received from a cash-out mortgage, they may immediately begin using those credit cards to make new purchases, building up their debt once again. This will quickly leave them with the same amount of debt, but with no equity in their property.
Homeowners are also cautioned not to refinance their homes for large sums of money much greater than what they need. Doing so will put them in more debt overall, and that will be debt that will take much longer to pay off.
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