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Refi to pay down credit card debt
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November 9, 2001: 11:11 a.m. ET
Should we refinance our mortgage so we can pay down our credit card debt?
MONEY columnist Walter Updegrave
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NEW YORK (CNNmoney) - My husband and I have too much debt, so we've stopped using our cards and begun paying them down sloooowly. Now that interest rates are down, however, we're thinking of refinancing our mortgage and using the savings to pay down our credit cards. Is this a good move?
Congratulations! You and your husband have already taken a big step by admitting you've taken on too much debt and by beginning to repay those credit card bills. And now, with current mortgage interest rates so low courtesy of the weak economy and the Federal Reserve's rate cuts, you've got two choices for ridding yourself of that nasty high-rate credit card debt altogether.
The refi approach
Your first choice, as you suggest, is to refinance your mortgage. Depending on the rate on your current loan, this move may be able to free up some significant cash for you. For example, if you had taken out a 30-year fixed-rate $150,000 mortgage a year and a half ago when interest rates were close to 9 percent, you're probably paying about $1,200 a month in principal and interest. If you take out a new $150,000 loan at 6.5 percent -- about the average going rate today -- your monthly mortgage payment would drop to about $950, saving you about $250 a month pre-tax. You could use that extra cash to wipe out your plastic debt, after which you could, oh, let's say, build up your investment portfolio. (To estimate the amount you might save by refinancing and to see how many months of savings it will take to recoup the costs of taking out a new loan, check out our mortgage refinance calculator.
There is a potential downside to this scenario. If you've had your mortgage for many years, then refinancing with a new 30-year loan means you'll be making mortgage payments a lot longer -- and you'll rack up more interest charges -- than if you had stuck with your old loan. Of course, once you pay off those credit cards, you could then use your monthly savings to prepay your new mortgage, thus shortening the term and cutting the interest cost. But making extra mortgage payments when they're not mandatory requires quite a bit of discipline.
Consider a home equity line of credit
If you want to repay those credit cards but don't want to take on 30 years more of debt, there is another option: consider taking out a home equity line of credit. Today, you can get these lines at the prime rate -- recently 5 percent -- and in some cases even a quarter to a half a percentage point below prime. By transferring your credit card debt to a home equity line of credit, you would not only reduce the interest rate you're charged, but your interest payments would also likely become tax deductible. The money you save from the lower rate and taxes could then be used to boost your payments on your credit cards. For the latest rates on home equity lines of credit, click here.
One last thing. Whatever you do, don't wipe out your credit card debt and then go back to your free-spending ways. You've been given a great opportunity here with interest rates dropping so low. Don't blow it by running up your plastic balances again. 
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