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Updated: May 25, 2023

Drowning In Debt? 4 Crucial Questions to Ask Before Refinancing Your Home

To get out of debt, should you refinance your home to pay credit cards, student loans, car loans and other bills? When is it a good idea to refinance?
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Are credit card bills, student loan payments, car loan costs or other debt weighing heavily on the budget month after month? Are bills getting paid late, costing you more in fees and potentially ruining your credit score, because there is always too much month left at the end of the money?

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If you own a home and have some equity in it, taking out a second mortgage, called a home equity line of credit (HELOC) or home equity loan could seem like an attractive option to consolidate bills.

However, doing so can have its drawbacks as well as its perks. There are many factors to consider before jumping into a decision to leverage collateral in your home against other debts.

1. Is the lower interest really cost-effective?

Most home equity loans carry a lower interest rate than credit cards, car loans or even some student loans charge. However, that rate is usually paid over a longer term such as 15 or 30 years, versus a five-year term for something like an auto loan. Paying a lower interest rate could end up costing a lot more over a long term, and even paying the loan off early can come with added fees.

2. Gambling on a primary residence

A home equity loan or HELOC can be a valuable tool to help a person or family emerge from having to juggle payments and constantly cutting too close on meeting payment dates or amounts, but don't forget: this is your house. If you find yourself unable to make credit card payments, your credit will be adversely affected and the account will be closed, but if you become unable to make the HELOC payments, the bank can take your house.

3. Banking on the housing market

Anyone who hasn't been living under a rock witnessed at least some of the financial devastation inflicted on the country after the housing bubble crashed a few years ago. Housing prices in many markets appear to have stabilized, and in some areas, interest is in high demand, but the direction could turn downward again, and the value of the home could end up being less than what is owed. If you aren't planning on moving any time soon and can continue to make the payments, that won't be an issue, but if you need to move, you could end up selling for less than what is owed.

Just because your bank might be counting on an upward trending market doesn't mean it will go that way. If taking out a loan to pay off debt puts you too close to maxing out the equity in the home, taking the risk could lead to financial disaster down the road.


4. Can you trust yourself?

Having a smaller and singular monthly payment after rolling debt into a HELOC could help a spender turn into a saver, but a true spender might find the allure of having extra money -- or worse -- having several credit cards with large, empty balances overwhelming. Rolling debts into a home equity loan or line of credit is only advantageous if it doesn't lead to more spending and further debt. It is crucial to be realistic about your own spending habits. Anyone considering using a home equity loan or line of credit to convert other debt into one payment needs to think very carefully and honestly about spending habits and savings goals.

While closing a credit card account after paying it off can put a ding in your credit rating, racking up debt that can't be paid and late payment hits will also adversely affect a credit rating. It isn't worth keeping the credit cards around if they are going to lead to more problems.

If it is desirable to have one card open for emergency purposes, be sure to make only occasional, small purchases on it and pay the bill promptly. This will keep the account active so the bank doesn't close it and can be part of maintaining a healthy credit score.

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