Tuesday, February 19, 2019

Reader Question - Pay of debt by refinancing mortgage?

I was recently asked the following question:

Over the past two years with a $120k income, I’ve paid off $40k in debt and still have $90k in credit card, student loan, and car loans left to pay off. I’ve recently gotten more serious about debt payoff and should be able to pay off the remaining $90k in the next 12-18 months as I get married and combine finances with my fiancĂ©. I also have $120k in home equity that I’m considered cashing out through a refinance to just be done with debt. Should I refinance my home to pay off debt?

Here was my response:

Short answer: No, I don’t think you should do this.

First off, great job buckling down and getting serious about paying off debt. Your previous rate of paying off $20k/yr was pretty slow considering your income. Paying off debt in one fell swoop feels nice, but in this instance all you’d be doing is moving the debt not actually paying it off. Given your lack of debt payoff intensity to this point, I’m also not sure you won’t go back into debt again once you feel like you’re debt free (even though you’re not).

Another reason I don’t like this idea is that you’re putting your house at a greater risk of foreclosure by increasing your payment, and reducing your equity. I’m not saying that will happen, but if you default on your credit cards, there is no collateral for the banks to go after. Likewise, if your car got repossessed that’s better than not having a place to sleep. Student loans have an advantage too in that if you die, the outstanding balance is forgiven. If your student loans shifted to your mortgage, that’s like giving away a free life insurance policy.

12-18 months really isn’t that long of a time to be completely debt free, I would just make sure that you have good discussions with your fiancĂ© to make sure you’re on the same page with this financial plan. This has the potential for a lot of backfiring if not properly communicated. After paying off debts, you’ll be shocked at how quickly you’re able to build wealth with such a high joint income and no payments. Having financial goals to work towards together makes for a great foundation in a new marriage.

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