Since I Have Bad Credit Should I Refinance My Mortgage to Pay Off a HELOC?
By Francine L. HuffMortgage Credit Problems Columnist
In recent years many
homeowners took advantage of home equity lines of credit (HELOC) to pay for
home improvements, vacations, tuition, and other goodies. But a slowing economy
and declining housing values have some people with bad credit wondering if they
should keep their HELOC or refinance their mortgage as part of a debt
consolidation plan.
What Makes HELOCs
Popular?
Much of the appeal of HELOCs is that they have been easy for
most people to obtain. Some people with bad credit who had taken on more mortgage
than they could really afford were able to get HELOCs with little effort. But HELOCs
carry adjustable interest rates that consumers have no control over, making it
hard for some to manage the monthly payments. Even if the Federal Reserve continues
to lower interest rates the damage has already been done for those already
delinquent on their loan payments. For people hoping to repair bad credit it
may make sense to refinance.
Why Refinance?
For people with bad credit it may seem like a constant
battle to dig their way out of debt. But a good debt consolidation strategy
that involves refinancing a mortgage may help get their finances under control.
A cash-out refinance involves getting a new mortgage for more than you
currently owe so that the extra cash can be used to pay off a HELOC. This
strategy can allow people with bad credit to use the new mortgage for debt
consolidation with a fixed-rate loan. While a cash-out refinance will probably carry
a higher interest rate than a regular mortgage refinance, it should still be
less than the rate on a HELOC.
Why Keep a HELOC?
For some people it may not make sense to refinance a HELOC
if they already have a low interest rate on their mortgage. And if their credit
is worse than when they took out the original mortgage they may not be able to
refinance it at an affordable rate. Homeowners should also check to see if
there's a prepayment penalty for paying off a HELOC early. If they're still looking
for a debt consolidation plan it may be more effective to use their HELOC to
pay off high-interest credit cards. Although the HELOC may have a higher rate
than a first mortgage, it will likely be below the rate on many credit cards.
The interest on a HELOC may also be tax deductible (check with a tax
professional). Another option is to switch to a fixed-rate home equity loan and
pay less interest.
It's important to weigh all the facts and run the numbers
when trying to decide whether it makes sense to refinance your mortgage to pay
off a HELOC. Having a HELOC means you can borrow money when you need it. But
some people are just too tempted by having an open line of credit and may be
better off doing a refinance to get rid of their HELOC altogether.
Source
CNNMoney
"Helocs from hell," by Les Christie,
www.money.cnn.com.
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.
About the 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.
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