I refer to this type of debt as non-preferred debt because it is not tax deductible. On the other hand, mortgage interest, in most cases is tax deductible. I consider this preferred debt. So the goal would be to swap non-preferred debt for preferred debt.
With this strategy, you would use either a refinance of your existing mortgage or a 2nd mortgage to access the equity in your home. Then you would use that money to pay off your other bills. It will depend on each person's situation in deciding which of these options is best.
There are many reasons why this can be a good strategy. You can turn non-tax deductible debt into tax-deductible debt. The interest rates on mortgages will be some of the lowest rates you can find, usually much lower than most other forms of debt. Finally, your total monthly payments should go down giving you more cash flow at the end of the month.
There are a few reasons why this can be a bad strategy. The big one is if you go out and charge up a lot of credit card debt again. This will defeat the purpose of the original debt consolidation and put you back into a bad financial position. Also, the amount of debt needs to be large enough to make the new loan cost effective. There will be a transaction cost involved in the new loan. You will need to have a benefits analysis run on your personal situation to see if this strategy will make sense.
Now, one of the keys to this strategy is that you use the money that you save monthly and pay it towards your mortgage principal, or put into a side account where it can grow. By using the money saved, you begin to pay off the credit card debt while enjoying the tax savings.
If home equity is used wisely, it can be a great way to put your financial house in order.
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