Should Other Debts Be Included in a Mortgage When Refinancing?

[May 15, 2009.]

 

Mortgage refinancing activity has been strong recently as many homeowners look for a way to reduce their monthly payments. One reason for the rush to refinance is that 30-year mortgage rates averaged 4.76% last week, near record lows. In some cases people may want to include credit card debt and auto loans when they refinance. While doing this may work for some people, it’s not necessarily the right solution for everyone.

Of course the main benefit most people will see to refinancing their mortgage is getting a lower interest rate. Not only will that lower their monthly payments, but it will reduce the total amount of interest they owe over the life of their loan.

Mortgage Related Tax Deductions

The interest a person pays on a mortgage is tax deductible. So adding other debts into a mortgage refinance means that they may be able to deduct an even larger amount of interest. However, it’s best to consult with an accountant to determine exactly what an individual’s tax situation will be after refinancing because there may be a limit on how much additional interest can be deducted.

Unsecured vs. Secured Debt

Mortgage debt is secured by a person’s house. Credit card debt is not. However, when a homeowner throws credit card debt into a mortgage refinance, they are adding to the amount of secured debt they have. That means that if they later lose their job or have other serious financial problems, there may be a greater likelihood that they could lose their home if they struggle to keep up with the monthly payments on their mortgage.

Declining Home Equity

Some people who take on too big of a loan by refinancing also may end up with less equity in their home. That’s because housing values have fallen so much in some areas. A homeowner who loses too much equity in a refinance could find themselves paying private mortgage insurance (PMI) on top of their other monthly payments.

Including credit cards, auto loans, and other debt in a refinancing can help homeowners lower their overall monthly payments on a mortgage and get off the debt treadmill. But individual homeowners need to take a realistic look at their situation to determine how stable their job situation is, whether or not they can handle the new monthly payments, and how long they plan to stay in their home.

Homeowners looking to refinance can begin their search for the right mortgage loan here.  

 

 

About Author:

Francine L. Huff is a freelance journalist and the author of The 25-Day Money Makeover for Women. She has appeared on a variety of TV and radio shows.