Refinance? What do you think?

[Chicago526]

Okay, here's the deal.

Right now DH and I have $15k in CC debt. We have 20% equity in our home and 28 years left on a 30 year fixed.

I'm kicking around the idea of refinancing to a 20 year fixed mortgage and pulling out 15k in equity to pay off said CC's. This will drop us to 12-15% equity, but we don't plan on moving for at least 5 years at the earliest, so I'm not too worried about that or the sagging housing market.

Our monthly house payment would only go up by $235 or so (including the mort. insurance we'd have to pay for being under 20% equity).

We have not charged a dime to the CC's in 2 years, so I'm not concerned that we'll run out and charge them back up again. And I like the idea of paying off the house 8 years sooner.

I don't like the idea of financing CC purchases over the next 20 years, but I'm sick of the CC's hanging over my head, and the extra money each month, while not nessesary as we make ends meet just fine, would be nice. I'd like to beef up our savings, we want to start a family and my car will need to be replaced in about two years.

Is there a down side I'm not seeing? What do you all think?

 

[Toby'sFriend]

what is your current interest rate on the cards

your current interest rate on your mortgage

and

what rate would you be refinancing to?

 

[Skatermom23]

I can't imagine you would get a great rate on a refi right now and it makes no sense to pay the mortgage insurance. I would put any extra cash that you have towards your current mortgage and get on track to pay it off early and then negotiate with the CC companies to get the best rate you can. If necessary, transfer the balance elsewhere.

 

[Stein]

There are four downsides: you may run the cards back up, you are placing you home at higher risk (trading unsecured debt for secured debt), it will cost you more in the long run (mortgage insurance, refi costs and much longer payoff time), and if the market continues poorly, you may have a hard time selling either in an emergency or because of job loss, transfer. 12% equity is a razor thin margin if you look at selling.

I would get intense and focus on paying them off without the refi and then you can focus on the house.

To put it in emotional terms, think of one thing you put on the credit cards and ask yourself if you want to be paying on that item for 15 years?

 

[Chicago526]

The CC's range anywhere from 0% to 11%.

The current 30 year fixed is at 5.75% APr

The new 20 year would be 6.105% APR

The 20 year is slightly higher, but we'd have it paid off 8 years sooner, I didn't crunch the numbers but I think it would be close to a wash.

 

[Chicago526]

There are four downsides: you may run the cards back up, you are placing you home at higher risk (trading unsecured debt for secured debt), it will cost you more in the long run (mortgage insurance, refi costs and much longer payoff time), and if the market continues poorly, you may have a hard time selling either in an emergency or because of job loss, transfer. 12% equity is a razor thin margin if you look at selling.

I would get intense and focus on paying them off without the refi and then you can focus on the house.

To put it in emotional terms, think of one thing you put on the credit cards and ask yourself if you want to be paying on that item for 15 years?

1) We haven't charged anything in two years, so I don't think well start that up again. And most of the 15k was from the wedding anyway, we don't actually buy very much beyond esentials.

2) I'm comfortable with the 12-15% equity, the market here hasn't tanked, it just isn't going up anymore and it's taking longer for most people to sell. Obviously that can always change, of course, but I'm aware of the risk. And we won't be selling for minimum of 5 years, neither DH or I can be transfered, and in the event of a layoff, would be able to find employment in the area.

3) I haven't run the numbers, but since we'd have the house paid off 8 years sooner, I think it would be a wash

4) This is the point I like the least, I don't like financing consumer debt for so long. So far this is the biggest downside for me.

 

[Skatermom23]

The CC's range anywhere from 0% to 11%.

The current 30 year fixed is at 5.75% APr

The new 20 year would be 6.105% APR

The 20 year is slightly higher, but we'd have it paid off 8 years sooner, I didn't crunch the numbers but I think it would be close to a wash.

Yes but by just paying more on your current mortgage loan, you can still pay it off 8 years sooner and you save by having a lower rate, not paying mortgage insurance, and no refi closing costs. I would instead focus on paying your CC's with any spare change you have.

 

[janette]

There are closing costs involved with a refinance, just not usually a good idea unless it is going to recoup those costs quickly and doesn't sound like it would.

I'd just try to get some cards with a fixed low interest rate to transfer your balances too. Even the 11% isn't outrageous and if you put the extra you'd be paying for the mortgage to that debt it would go away pretty quickly.

If you had more equity, or maybe would save on your interest on the house loan it might be worth it but I can't see any advantage for you. Paying it off early is only an advantage if you pay off the mortgage and you've said you are unlikely to do that.

 

[punkin]

I wouldn't.

You have been doing really well paying off the cards (I read your prior postings) and why make secured debt out of unsecured debt?

As far as paying off the house early, just make additional principal payments (if you don't have a pre-payment penalty).

As far as the higher interest cards, just open up new accounts with 0% interest on them. Keep moving those balances onto new 0% cards when needed. I have been doing this for the past 3 years.

 

[Chicago526]

There are closing costs involved with a refinance, just not usually a good idea unless it is going to recoup those costs quickly and doesn't sound like it would.

That is something I still need to find out, the closing costs. I'm still kicking around the idea and haven't fully researched it yet (and would not make a final decision until I do research it fully!)

I'd just try to get some cards with a fixed low interest rate to transfer your balances too. Even the 11% isn't outrageous and if you put the extra you'd be paying for the mortgage to that debt it would go away pretty quickly.

Been there, done that, bought the tee-shirt. There isn't alot of extra to put towards the credit cards, and our budget is pretty bare-bones. We make ends meet with a bit left over, but that "bit" isn't much.

If you had more equity, or maybe would save on your interest on the house loan it might be worth it but I can't see any advantage for you. Paying it off early is only an advantage if you pay off the mortgage and you've said you are unlikely to do that.

Not sure what you mean by not paying off the mortgage, this would actually have us pay it off sooner (and yes I know I can do that by paying extra each month w/out the refi). But the rest, IF I decide to do the refi, I'd wait and see if the Fed cuts rates some more, I think they just might. If not, then I'd either not do it or swallow the slight increase in rate.

I appreciate the feedback so far! So far no one has said anything I haven't already anticipated, but I still like having a sounding board. Keep it coming!

 

[staceyfe]

I wouldn't.

You have been doing really well paying off the cards (I read your prior postings) and why make secured debt out of unsecured debt?

As far as paying off the house early, just make additional principal payments (if you don't have a pre-payment penalty).

As far as the higher interest cards, just open up new accounts with 0% interest on them. Keep moving those balances onto new 0% cards when needed. I have been doing this for the past 3 years.

ITA w/ all of the above. No need to pay a higher rate on the house to pay it off early when all you have to do is simply pay extra every month (if you want to know how much extra, go to a financial website like Kiplinger's and use the tools there). Many cards offer 0% on balance transfers...you just have to apply. After all, the point here is to keep more money in your pocket and less interest in the pockets of the financial institutions. You could also consider a separate HELOC, but I'd try the 0% balance transfer first.

 

[janette]

Been there, done that, bought the tee-shirt. There isn't alot of extra to put towards the credit cards, and our budget is pretty bare-bones. We make ends meet with a bit left over, but that "bit" isn't much.

Will the new payment be less than the current + min on the CCs? I read it as you'd be paying more.

Not sure what you mean by not paying off the mortgage, this would actually have us pay it off sooner (and yes I know I can do that by paying extra each month w/out the refi). But the rest, IF I decide to do the refi, I'd wait and see if the Fed cuts rates some more, I think they just might. If not, then I'd either not do it or swallow the slight increase in rate.

you'll have to live there 20yrs to pay off the mortgage, you've said that is unlikely so you probably won't have this advantage. In 5yrs you'd be unlikely to gain much in additional equity either so for you the shorter term isn't a plus

 

[Stein]

I know you mentioned you have done it before, but can you surf it to 0%? If you could, that would save $137 a month or so with little or no other effect.

Another option would be a personal loan from a credit union or the like.

I am just leary about putting more debt on the roof of the house that keeps me dry and warm at night. Maybe a bit paranoid, but there are plenty of stories around of people who thought everything was going to be fine and their jobs were secure. Granted most made a mistake, but nobody knows what is going to happen in the next few years and "innocent" people sometimes get swept out to sea in the flood.

 

[barkley]

not know all the particulars of your situation i going to make some assumptions.

i assume both you and your spouse work-right now you can afford the current house payment as well as the c.c.'s. that's good. now if you are planning on having children-will you continue working? if so plan on a big added expense for childcare. even if you have someone who will provide it free-there's still the time off for the birth, and possibly time off before if needed, so unless you have some resource (state disability insurance or a private policy or paid maternity leave) your income will decrease for that period of time. if you plan on not working you obviously will go down in income. either way, if your health insurance is paid in any part by you-it's rare that adding a child does not increase the premium (and the co-pays)-so there's another hit to your income. we won't even talk about how much the basic expenses of having a child are $$$$$$$$ . so don't just look at your current or projected 'normal' income. look at your potential 'parental' income.

that said-if it were me-if you have emergency savings already in place (even if you can find employment in the case of job loss it might not be as quickly found as you anticipate, even if a person has disability insurance it often does'nt pay out until after a 3 month waiting period and another 1 month of processing time, and -as was the situtaion in my life- it does'nt pay out for a spouse that has to stay home to care for their disabled spouse or their child who the disabled spouse is unable to care for)-start throwing money at the credit card debt. decrease it as much as possible, never paying less than the minimum, but never paying so much as places you in financial jepordy. as far as the house goes-use one of those ammortization sites on the web and see how much you would have to pay per month (or on another schedual) to do the pay-off quicker-and if you wish to, start paying of your own free will-not because the terms of a re-fi force you to. you can pay it off quicker without obligating yourself to HAVE to make that higher payment (and i'de suggest if you are planning on starting a family, instead of paying pmi which is only of benefit to the lender-consider life or mortgage insurance that would pay off the entire home loan in the event of one of the spouse's deaths. we've paid a small amount for this for years and it's of tremendous peace of mind to know that if something happened to either of us the home would be paid in full. this was esp. brought home to us when one of my former co-workers, 8 months pregnant, lost her husband one night due to an out of the blue/no history to indicate heart attack her credit card debt was the least of her problems when she went into foreclosure). the one thing i would say about paying off a mortgage early-in the event you are in desparate need of money, it's not a guarantee that you can access it easily. short of selling it-unless a person has a job that is generating income, a lender is not going to float a loan. you have to be able to pay on that money you pull out of your equity-so depending on the circumstances of need; you may find that you can't access your biggest 'savings'. it's always good to have liquid savings. another issue with paying off your mortgage early is how it will impact you tax wise. while 'yes' you def. save by not paying that interest each month-depending on your tax bracket, that write off of mortgage interest can be what pulls you down into a bracket that generates a lower tax rate and eligibility to some write off's and tax credits (we could have bought our current home outright because of good fortune with the sale of our previous home, but when our cpa crunched the numbers we found that over the course of dh's anticipated work life we would pay out substantialy more in taxes by virtue of not holding some form of mortgage than we will ever pay out in interest).

ya know, if you have a cpa or know of one-it can be worth the money to have them run the numbers for you on what's to your best advantage. better to put out a couple of hundred and get some hard, accurate figures than obligate yourself to something that may in the long run cost allot more.

 

[allison443]

you'll have to live there 20yrs to pay off the mortgage, you've said that is unlikely so you probably won't have this advantage. In 5yrs you'd be unlikely to gain much in additional equity either so for you the shorter term isn't a plus

I agree with this

 

[tlbwriter]

Okay, here's the deal.

Right now DH and I have $15k in CC debt. We have 20% equity in our home and 28 years left on a 30 year fixed.

I'm kicking around the idea of refinancing to a 20 year fixed mortgage and pulling out 15k in equity to pay off said CC's. This will drop us to 12-15% equity, but we don't plan on moving for at least 5 years at the earliest, so I'm not too worried about that or the sagging housing market.

Our monthly house payment would only go up by $235 or so (including the mort. insurance we'd have to pay for being under 20% equity).

Are you sure those numbers are right? You can go from a 30 year to a 20 year, increase your interest rate, pull out $15K of your equity, roll in closing costs, add PMI, and your payment will still only go up $235?

Personally, I wouldn't do it. I see why it appeals to you - on paper, it makes sense. But I just wouldn't trade unsecured debt for debt attached to my house.

 

[EthansMom]

DON'T DO IT!!!!!! Here's why:

You'd have closing costs associated with the refi. And you're trading a lower-interest rate mortgage for a higher interest rate mortgage.

So, say you owe $200,000 on your current mortgage, closing costs for a refi. are 1% (which is very conservative), and you roll your closing costs into the new mortgage. The first thing that happens is that you now have $2000 MORE debt than you had before ($200k orig. mortgage + $2k closing costs +$15k cc).

The second thing that happens is that you are paying MORE money on your mortgage than you were before (6.105%-5.75%=.355%). So, on your original amount of mortgage you would pay $200,000*0.35%= $710 MORE in interest in the first year than if you had stayed with the first mortgage. And that's just the EXTRA interest on the original mortgage amount, doesn't include the $12.21 you'd pay in interest on the 1% closing costs.

Oh, and you'd be paying back that $2000 in refi. costs to the added tune of $100 per year. So, your costs to refi. would be $710 in extra interest on original mortgage + $100 in repayment of refi. costs + $12.21 in interest on the refi. costs = $822.21 in the first year.

Also, by going from a 30 year to a 20 year mortgage, you further increase your monthly payments. But you've already said that your current budget doesn't have a lot of room in it, and you aren't likely to be in this house for 20 years, so why would you want/need to go to a 20 year mortgage? (20 year rates are usually the same or close to 30 year interest rates, so you don't get a rate cut.)

Also, the most you could be saving on the interest rate from the credit cards would be $15,000 (11%-6.105%) = $734.25 in the first year. Hmmmm... you'd save yourself $734.25 in interest on credit cards, but be paying $822.21 in a higher interest rate and refi. costs.

My advice would be to keep the mortgage you have and use the Debt Snowball Method to pay off your credit cards as quickly as possible. Here's how you do Debt Snowball: You don't charge anything new to the credit cards. You pay the minimums on all of the credit cards. Any extra money you can get your hands on goes towards paying down the debt on the highest interest credit card. When the highest interest credit card is paid off, you put all of your extra money toward the next highest interest credit card. This takes discipline but it really does work! My DH and I paid off tens of thousands of dollars in debt using the Debt Snowball Method.

Good Luck!

 

[mickeyfan2]

I agree with the others - don't do it.

 

[Toby'sFriend]

I agree with the others. The numbers just don't support the risk.

I understand the emotion of wanting the credit cards gone, but you'll get there and you'll get there in far less than 20 years.


Really what you are suggestion isn't going to make them "gone," it is just going to rename them as "additional mortgage."

 

[brockscandy]

I agree with the others - don't refinance. One person mentioned the debt snowball and I agree with this method. I would suggest going to the library and checking out Dave Ramsey's Total Money Makeover. He explains all of this very well AND there are some great motivational stories in it to keep you focused. Good Luck