Should You Refinance Your Mortgage To Pay Off Credit Cards?
Maybe you’ve heard about paying off credit card debt with a VA cash-out refinance, or maybe you know someone who has done it before. Maybe you never even knew that this was possible.
With credit card debt rising across the nation, it is becoming more common to see people getting cash-out refinances on their homes to pay off credit card debt. The appeal is obvious, and if done responsibly, veterans can pay off their credit card debt while saving money on their homes.Ready to refinance? Start here (Jun 8th, 2023)
What are your refinance options?
For veterans, the best option is likely a VA cash-out refinance, one of two refinance options offered by the VA.
In fact, VA cash-out refinance are the most popular refinance option offered by the VA, outnumbering the total number of IRRRL refinances nearly 2:1.
Why is the program so popular? One reason is that veterans can get lower rates, potentially saving them money compared to their current mortgage.
Another is that the cash from the refinance loan can be used on anything. Veterans use cash from the new loan for all sorts of purposes, from funding home improvements to buying a new car.
But one trend that has become popular is using cash to pay off high-interest debt like credit card debt.
So, is it worth it for veterans to pay off credit card debt with a cash-out refinance? That depends on their personal situation. Here are some reasons why veterans should or should not consider this approach.Click to check today’s VA cash-out rates (Jun 8th, 2023)
The benefits of paying off credit card debt with a VA cash-out refinance
For eligible veterans, a VA cash-out refinance is likely going to be the best cash-out refinance option available. Here are some of the reasons veterans use this refinance to pay off credit card debt:
Instead of paying different interest rates for different types of loans or debt, it’s much easier for most people to track their finances if all their debt is in one place.
If you have enough equity, you can turn all your debt into a single loan — one that potentially has a lower interest rate.
Consolidating debt can save some veterans a lot of money. If the new rate on the VA cash-out refinance is lower than the interest rate on the credit card, then the savings are clear. Borrowers can essentially have the same amount of money owed while paying much less on each month – and this time, you only have one monthly payment: your mortgage payment.
The VA cash-out refi is available to all eligible veterans
Unlike the IRRRL, veterans that purchased their home with a different mortgage program, such as FHA or conventional, are still able to refinance through the VA.
On top of freeing up cash to pay off any debt, this refinance can save homeowners money. The VA doesn’t require any type of mortgage insurance regardless of how much equity the homeowner has. Using this refinance can wipe out any of those insurance payments for the duration of the mortgage.
Credit card debt can cause some damage to credit scores. When the debt is paid off, the amount of usable credit on the card increases. This credit utilization is an important part of calculating credit scores, and as it drops, credit scores tend to increase.
Lower monthly payments
Yes, you could potentially lower your monthly payments with a VA cash-out refi, regardless of if you have credit card debt or not. Mortgage rates have changed a lot over the last 10-20 years, and there’s a chance that rates have dropped since you purchased your home.Click to check today’s refinance rates (Jun 8th, 2023)
Things to look out for when refinancing
Each veteran has a different financial situation, and for some a mortgage refinance isn’t the best option at this time. Here are some reasons that veterans might want to put off a refinance:
While many veterans save money through their VA cash-out refinance, they’ll still have to pay for the loan through closing costs. This is standard with every type of mortgage and refinance.
Closing costs can easily be offset with long-term savings on the mortgage loan over the full loan term, but homeowners will still need to come up with the money to pay the closing costs for the new mortgage.
Different rates and terms
In the period of time since you first purchased a home, there is a chance that current rates are higher than those you currently have. A higher interest rate would mean paying more on a monthly basis.
The best way to avoid this is to make sure that your mortgage interest rate isn’t jumping before you accept the refinance.
Putting your home on the line
When refinancing to pay credit card debt, it’s important to remember that you’re taking on secured debt to pay off unsecured debt. This means that your house itself is the guarantee should you fail to pay your mortgage and, unlike your credit card debt, failure to make your monthly payments could result in foreclosure. So consider your personal finances and don’t refinance and pay off credit card debt only to run up more!
VA cash-out rates
Curious if a VA cash-out refinance is the best option for you? Eligible veterans benefit by having access, but every situation is different.
The best way to determine if you should get this refinance is to check what rates are currently available. If today’s rates are ideal for your situation, it could mean big savings while erasing high-interest credit card debt.Click to check today’s VA cash-out refinance rates (Jun 8th, 2023)