Benefits of Paying off Credit Cards in a Mortgage Loan Refinance
There are many reasons that one may choose to refinance their mortgage: lock in a lower rate, go from a variable rate to a fixed rate, get cash out of their home’s equity, or pay off credit cards. There are differing points of view when it comes to paying off credit cards or auto loans with a mortgage refinance. However, there are several benefits of consolidating debt into a home loan refinance. Because each refinance is unique to your current financial situation, you should consult your tax or financial professional to see if any of the following benefits will apply to you.
Gain tax breaks
Your home loan mortgage interest is a tax deduction, if you currently itemize on your tax return. Of course you pay interest on credit cards, auto loans, and personal loans, and none of that is a tax deduction for you. Rolling some or all of these items into your mortgage refinance can increase your tax return or assist in reducing what you may owe.
Reduce your interest rate
Revolving debt (credit cards) compounds interest daily. That means that your balance grows a little bit each day. A mortgage is simple interest, meaning that it compounds interest monthly. Not only can you reduce the compounding of interest, credit cards and other unsecured debt usually have much higher rates than the interest rate attached to your home mortgage loan. Adding these items in with your mortgage gives you a lower rate and will also reduce your overall payments each month, and that means more money in your pocket.
Increase credit score
Even if you pay all of your bills on time each month and aren’t in need of credit repair, you can still increase your credit score by paying off multiple smaller accounts. If you have a credit card that has a limit of $5000 and you have $4500 on that card, you may be able to increase your credit score by paying that off or lowering the amount you owe. The credit bureaus definitely look at whether or not that credit card payment is being made on time each month, but another factor that goes into the credit score is amount of available credit. So if you have several smaller accounts
that are close to their limits, it may be dragging down your score. A good rule of thumb is to keep credit cards at or below a 50% balance to credit limit extended, so on that same $5000 credit limit, you want to keep the balance below $2500.
Convenience
If you consolidate your credit cards and other debt with your mortgage refinance, you will have one payment each month, rather than several due at different times throughout the month. What you need to keep in mind though, is that bill consolidation and refinancing is not something that you should need to do every few years. Close the credit cards that you paid off in the refinance so that you are not tempted to use them again.
Take the money that you are saving each month and put in a retirement account, savings account or make additional principle payments on your mortgage. Do the same with your additional tax refund. Think of your mortgage refinance as a tool to put you in a better long term financial situation.