Financial Mistakes: Rolling Unsecured Debt into Your Home Loan

Financial Mistakes: Rolling Unsecured Debt into Your Home Loan

A few weeks ago, we introduced the terms unsecured and secured credit. Melinda did a great job of defining the terms in her "Simple Does It" series, and now that we have a great definition base, it's time to put those definitions to work! Today, let's look at a common financial mistake that includes both secured and unsecured debt: rolling an unsecured loan into a loan secured by your home.

A Review of Some Terms

Let's look over the terms briefly first. A secured loan is any debt that is attached to an actual, physical property like a car or home. An unsecured loan is any debt that is not attached to a physical item. In secured loans, if you default on the loan, the bank can take back the property. In unsecured loans, the bank can ding your credit or take you to court.

An Overview of the Problem

Okay, so let's look at the issue in question: rolling unsecured debt into secured debt. Let's say you owe a ton of money on credit cards (an unsecured debt). The payments are quite large, so you're tempted to refinance your house so that you can use your home's equity to pay off the credit cards. I mean, having one massive payment (at hopefully a much lower rate) sounds like a plan, right?

Unfortunately, although this idea may help ease some strain on your pocketbook, it could leave you open to the danger of losing your home, should your financial situation change. For example, if you lost your job, the much higher payment for your home could be unsustainable over time. On the other hand, had you retained the credit card payments and your lower home payment, you may have been able to maintain the mortgage payments, even if you had to default on your credit card payments (or appeal to the credit companies for a break while you got back on your feet).

Alternatives to Refinancing Your Home

I know: this doesn't really help much in lines of easing your credit payments. If you can't roll your unsecured debt into your home, how can you loosen up some expendable cash while you pay down those debts? Here are a few ideas:

  • Take out unsecured loan: If possible, depending on your situation, you might be able to take out a large unsecured loan at a lower interest rate than your high-interest credit cards. This new loan could pay off the cards and possibly free up some income to get by while you pay off the unsecured loan.
  • Pay off your highest rate card first: Sometimes a new loan is not possible, so in this situation, focusing on paying off your highest rate card faster can help you get out of debt more quickly. Of course, to accomplish this, you might need to take the next step.
  • Bring in more income: Another idea is to get a second job, bring in side-hustle cash or sell items. All of this income should then be applied to your debt.

Debt is never easy to quash. Unfortunately, the solution to abolishing credit card debt is not refinancing your home; it's spending a lot of time and effort to pay off debts. Fortunately, though, if you follow the alternative tactics to getting out of credit card debt, you could protect your home in the process.

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femmefrugality's picture

femmefrugality wrote:

Tue, 01/31/2012 - 21:30 Comment #: 1

I don't even own, but I can't help but agree from everything I've seen and hear happen in the past couple of years. A lot of people who end up doing this end up going out and racking up the credit card bills again, anyways, because the issue of bad habits hasn't actually been addressed.

Christa Palm's picture

Christa Palm wrote:

Thu, 02/02/2012 - 22:04 Comment #: 2

Very true, Femme Frugality!

Julie @ The Family CEO's picture

Julie @ The Family CEO wrote:

Fri, 02/03/2012 - 20:06 Comment #: 3

I completely agree with this. It's tempting to do because the interest on credit card debt isn't tax deductible and the interest on a mortgage (usually) is, but it's risky, for the reasons you describe. Plus, it just "hides" the problem and can keep you from dealing with it. Ask me how I know. :)

Christa Palm's picture

Christa Palm wrote:

Fri, 02/03/2012 - 20:43 Comment #: 4

Julie, very true about the risk and hiding the problem! It is so tempting to do, but if at all possible, it's best to avoid rolling it all in.

Liz's picture

Liz wrote:

Thu, 03/29/2012 - 00:30 Comment #: 5

I might just follow what is recommended here as an alternative to my home refinancing. I'm afraid to lose tracks on my credit so I will be taking a few good steps to make my credit good all the time.

Christa Palm's picture

Christa Palm wrote:

Thu, 03/29/2012 - 16:23 Comment #: 6

Liz, great plan -- it's important to track your credit, and avoiding a refi that takes on unsecured debt could be very helpful.