A home loan is a significant financial decision, which means that it will have implications on your financial status for years to come. Home loans are relatively cheaper in terms of interest rate but they are often given with large principal amounts. These low-rate high balance characteristics make home loans one of the most challenging and tactical debts to deal with.
It is also usual to hear some borrowers asking if it is possible to pay their home loan via credit card. This may also enable you to earn rewards points and possibly delay interests charges. However, there are also some disadvantages of using of Information Technology. In this article, the author will explain the process of how one can use a credit card to pay for a home loan.
For most of the mortgages, one cannot use the credit cards to make the payment for the mortgage directly. It is evident that most mortgage lenders cannot accept credit cards since the cost incurred in processing credit card charges is relatively high. It could be possible, but I would like to believe that such exemptions would entail strict restrictions and high fees that are impractical.
It is very dangerous, and one should never try to pay off a long-term loan such as a home loan with a short-term, high-interest cash advance or balance transfer on a credit card. Sometimes maybe looks good but can lead to some sort of problem.
The Pros and Cons of Borrowing Money for Mortgages
There are a few reasons why using credit cards for mortgage payments is problematic:There are a few reasons why using credit cards for mortgage payments is problematic:
High Processing Fees Each passing transaction that involves a credit card, the merchant has to incur a fee for the processing of the transaction. In small transactions, this fee is minimal and thus will not significantly affect the total amount transacted. However for large payments such as a 1,500 mortgage payment, the number could be 50 or more. To reduce this cost, mortgage lenders do not allow clients to pay using credit cards.
Potential Risks for Lenders There are also credit risks for the lender. In case one challenges a mortgage payment made through a credit card, the lender may not be able to recover the money from the credit card dispute resolution procedures. This makes them vulnerable to various losses; thus, most of them do not engage in this situation.
Difficulty Meeting Minimum Payments The minimum payment that could be made in the case of a credit card to pay for the mortgage is considered unattainable for most borrowers. It will be possible to set the minimum payment at either 5 percent or 10 percent of the balance. For instance, at a standard 30-year fixed mortgage rate, a balance of 200 000 would result in 1000- 2000 minimum credit card payment.
Cash Advance Fees and Interest If you use a credit card cash advance to get the money for the mortgage, you are forced to pay interest starting from the moment of withdrawal and cash advance fees. The fees charged sometimes amount to five percent of the money that has been forwarded and the interest which usually is very high begins right from the time the money is forwarded. It is one of the most costly source of funds.
Balance transfer options and risks:
Certain borrowers who think about paying a mortgage with a credit card use balance transfer offers. Such promotions enable you to transfer a balance from another card under a lower interest rate, which in some cases is zero.
As a matter of fact, you could take your mortgage balance and transfer it to a credit card that offered zero interest for a limited period of time and save a great deal of money in interest charges in the short term. However, there are several issues to note:However, there are several issues to note:
Strict Balance Transfer Limits The majority of balance transfer offers will not even let you transfer an amount that comes anywhere near the size of a mortgage balance. They sometimes allow for a maximum of 5,000 characters or fewer. One that is high enough to be of any use is difficult to come by at this point.
Time Restrictions Promotional rates for balance transfers usually last for less than two years. So even if you could transfer your balance, the promotional rate would expire long before your 30 year mortgage is paid off. When the rate expires, the interest cost returns to the initial level, but the balance is still significant.
Increased Monthly Payments If you do meet these requirements, you could use your credit card to get a balance transfer large enough to pay off your remaining mortgage balance. But, the monthly payments may be too costly. Similar to a direct credit card payment, five or 10 percent of your total mortgage amount would translate to a very high monthly payment.
Effects on the Credit Score A credit card balance transfer also has the potential to harm credit by the hard credit check required to get approved as well as the impact on the higher credit utilization rate. Having a low score also means that you will not qualify for the cheapest mortgage refinance rates.
Using Home Equity Instead of Credit
Some of the ways in which you can cut down your costs related to your mortgage might be more effective than using credit cards. One approach is to tap into your available home equity rather than using high-interest credit card debt:One approach is to tap into your available home equity rather than using high-interest credit card debt:
Home Equity Loan Home equity loan is a loan where one has to borrow the money directly from a lender using the home’s equity as the collateral. This one places your home in jeopardy in case you are unable to make the payments; however, it will attract lower interest rates compared to credit cards.
Home Equity Line of Credit (HELOC) A HELOC operates similarly to a credit card, only the money borrowed is secured by your house. It operates like a credit card, where as much as one can draw depending on the limit and payments are made. However, the rates are often lower with home equity options once more.
Cash-Out Mortgage Refinance One option that will help you avoid incurring more debt is the ability to alter the mortgage to cover more than what you owe at the moment. This places the cash from your home’s equity back into your pocket. After this, you can use it to clear credit card balances.
Some of the Best Ways to Manage Your Mortgage Expenses
While using credit cards to pay your mortgage directly or tap into home equity is usually not the best approach, there are other credit-wise strategies that could save substantially on mortgage interest over time:While using credit cards to pay your mortgage directly or tap into home equity is usually not the best approach, there are other credit-wise strategies that could save substantially on mortgage interest over time:
Interest Rate: Loans can be refinanced to a lower interest rate which in return increases the overall ratio of the loan. Use the drop in mortgage rates by refinancing the home loan. A half a percent lower on your interest rate equates to thousands of dollars saved in interest fees. Time it right as rates drop and costs are covered swiftly.
Pay Extra Toward Principal You might also want to contribute an extra dollar or two towards your mortgage payment every month. Increasing capital by an extra 100 or more instead of interest expense can result in considerable savings in total interest expense in the long run.
It is thus necessary to be strategic when making decisions concerning IDR plans. You could opt for income-driven repayment (IDR), which could make payments slightly less expensive in the short term. These plans link your payment to your paycheck but extend the loan period. However, they should be used sparingly to minimize extra interest costs hence should be used strategically.
The Bottom Line
Using credit cards to control the flow of money and to minimize the expenses on a mortgage is only an illusion of addressing the issues, as it just shifts one concern to another. When it comes to fees, interest charges, and risk, it is rarely advantageous.
There are far more rational approaches to decrease the mortgage expenses during a long periods in a traditional methods, such as prepayment or refinancing. Instead of accumulating credit card balances to fund these practices, adhere to these effective strategies.
