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Spencer for Hire :: Cash-out Refinancing

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I get tons of emails, questions and letters from our community and I would like to start addressing them at least once a month in the hope that I can help people out there that might be going through the same issues. I will leave out names and cities for the purpose of anonymity.

Dear Spencer,

We are in the process of refinancing a 30-year mortgage to a 15-year mortgage at 5.375 percent. The current loan balance is approximately $50,000. We would like to pay all of our debts. Is it wise to borrow more money to pay credit card debt?

My Answer

Generally, it's unwise to borrow more than you need. In your case, however, it may be sensible to boost your loan amount to pay off additional credit card debts. For one thing, putting your credit card debt into your mortgage is likely going to save you on interest charges. The 5.375 percent interest rate is almost certainly going to be lower than your credit card debt's rate. If you're talking about plastic money rates in the teens or even higher, that can prove a huge overall savings.

Another plus to adding on credit card debt to a refinance is the inherent tax advantage. As you likely know, mortgage interest rate charges are tax deductible, whereas conventional consumer credit interest is not. That tacks on even more overall savings by moving your credit debt into mortgage debt. A very simple way to consolidate credit card or any other debt is to do a HELOC (Home Equity Line Of Credit). This is a simple way to have a credit card and all its advantages without having the problems of a credit card including its high interest rates. The loan is tied to the equity of your home and is taxes deductible as well. This by far is one of the best investments created. It protects you and gives you tons of advantages a regular credit card wouldn’t.

Convenience is also another way you will benefit. Rather than having to write check after check, consolidating your debt into one mortgage payment shrinks your obligation down to a single bill. If you're writing a bunch of checks to several credit card companies every month, there's something to be said for opting for simplicity.

Another thing you have going for you is the relatively modest mortgage balance that you're planning on refinancing. I ran some numbers and your monthly payment comes out to about $405. Obviously I don’t know your complete financial life but with that light a load, you can move a fair chunk of credit card debt into the mortgage without prohibitively boosting your monthly obligation.

To give you more options, I tacked on an additional $10,000 to your mortgage and came up with a monthly payment of $486. Adding on $20,000 (I certainly hope your credit card balances don't tally up that high) brings your monthly check up to $567. Granted, that's more than $150 more than you're paying without adding on credit card debt - then again, even that $150 may be more than what you're spending on credit card payments.

So, to me, the numbers make sense. I would get a HELOC or refinance in a heartbeat if I were in your shoes. But to be fair, there is a contrary school of thought, which states that people shouldn't tap into their nest eggs to pay down credit card debt. According to this view, people don't lock up their credit cards after taking out the home equity loan, and that's a recipe for financial disaster. They're left with no equity and then begin to create a new pile of credit card bills. If you think that you can't avoid that temptation, then a home equity loan isn't for you.

If you leave the card debt separate, make sure you earmark more than the monthly minimum so you can pay down the cards as quickly as possible. Always pay on time or a few days early to avoid any derogatory hits to your credit rating.

On the whole, however, pushing your credit card debt into your mortgage makes sense on several levels and one which eliminates your credit debt in one fell swoop. Hope this helped. See you next week.

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