February 2006 Bettin' the House: Will Refinancing Put Your No. 1 Asset at Risk? Admittedly, the plan has appeal: Solve all your credit card debt and any other debt by borrowing against the equity in your home. And because so many people are doing it, it feels like sound money management. But if you look at it another way the plan doesn't sound so good: Ring up a cumbersome credit card debt and then when the banks come to collect, jeopardize your home in exchange for some lower interest rates. You see, credit card debt and many other kinds of debt are considered unsecured debt. Meanwhile your mortgage and probably your car loan are secured debt because the loan agreement lists the home or car as collateral. If you default on your home loan or car loan, the bank can foreclose on either and essentially take them from you. Sounds like it should be called insecure debt doesn't it? All across America, banks and realtors are telling their clients their home is worth more than ever — that they have more wealth than they expected. And what is the response? People are giving it all back by refinancing to pay off unsecured debt. Homeowners who do this have now taken away their last line of defense — their home. If they get into financial trouble and can't pay their super-sized mortgage, they could lose their biggest asset, not to mention having to relocate. Also, what if the banks and realtors telling everybody their homes are worth more than they thought, come back next year and say they are not worth that much? Some folks will be paying a mortgage that's higher than what they can sell their home for! Refinancing your mortgage is not really a debt management plan. Refinancing is just shifting your debt from one bank to another and providing the bank more security by attaching this debt to your home. If you want lower interest rates, any self-respecting debt management company can negotiate your lower rates, protect your home and protect your credit. Here are some hard questions to ask yourself when considering refinancing to pay down other debt: Am I in trouble here and I just don't realize it? If I am, the last thing I should be doing is putting my home at risk. What is my plan for paying it back? Is that plan bullet proof? Will I still be able to pay off this higher mortgage if two or three things don't work out like I'm hoping? What circumstances have changed that will enable me to avoid taking on more unsecured debt after I refinance? Refinancing Risk Saving Stories Financial Quiz Clicking Coupons Career Corner Savings Strategies Part One Short on Cents Past Issues

Debt Matters is a source of general information about personal finance and is not a substitute for professional financial advice. Circumstances vary from one individual to another and advice in these articles may not be right for everyone. The publisher will not be held liable for any damages incurred by following the advice found in Debt Matters. © Debt Matters; www.debtmattersnews.com; 2005, 2008