 Pulling
equity from your home
|  Dear
Dr. Don,
I was wondering whether it would be a
good idea to refinance. My home is worth $200,000 and I owe $40,000 on the mortgage.
I wanted to refinance for $80,000 to pay off student loans and credit cards where
I am paying 18 percent interest. I still have 18 years left on the mortgage.
I
really need to get out of debt because my credit has been affected. I was fine
financially until my marriage of 23 years broke up and I went down to one income.
My current interest rate is 7 percent on my mortgage, which is not bad, but as
I said I need to pay off these other debts. If refinancing is for me, should I
stay with my current mortgage company and hope that some of the fees are waived?
Please help. Thank you. -- Tina Turnaround
 Dear
Tina,
Start out by recognizing that refinancing
your home doesn't get you out of debt, it just restructures the debt. Using a
cash-out refinancing or a second, home-equity, mortgage to pay off your credit
card debts can make perfect financial sense and still be the wrong thing to do
if you don't have the discipline to stay current on your spending.
If
the home and the mortgage are both in your name, you're a step ahead of many divorced
couples. You'll have to qualify for the new mortgage and that will depend on your
credit history, income and equity in the home. Get a copy
of your credit report to see where you stand before you start applying for loans.
All Americans can now get free copies of their credit reports. Thanks to the 2003
Fair and Accurate Credit Transactions Act, consumers are entitled to a free copy
of their credit report from each of the three major credit bureaus -- Equifax,
Experian and TransUnion. The program rolled out across the nation one geographical
region at a time with all consumers eligible on Sept. 1. The Bankrate feature,
"Free
credit reports for everyone," tells you how to request your free report.
You'll also want a copy of at least one credit score, which you can obtain from
one of the credit bureaus. Bankrate provides the contact
information. While it's unlikely that it's going to save
you much on closing costs, working with your existing lender is always a good
place to start, especially if you use Bankrate to check on mortgage
rates in your market to validate that you're getting a good interest rate
from that lender. Spending several thousand in closing costs that could have been
used to pay down your other debts doesn't save money. You
may have better luck with a home equity loan or a home equity line of credit.
Closing costs are typically much lower with these loans when compared to a first
mortgage. Since you're doing a debt restructuring, I think a home equity loan
makes more sense than a home equity line of credit. The Bankrate
Adviser series has an interactive worksheet that helps you decide between
a home equity line and a home equity loan. Restructuring your
student loan debt by converting it to mortgage debt can cause you to loose deferral
provisions, interest deductions on the interest expense or the ability to consolidate
the student loans. The loss of any applicable interest expense deduction should
be replaced by the deductibility of the mortgage interest expense, but the deferral
and consolidation provisions remain important considerations. If
you decide to tap your home's equity by restructuring your unsecured debt as mortgage
debt, you should take every precaution to make this a one-time deal. You've built
up $160,000 in equity in your home, but you're losing one-half of it by restructuring.
You don't want to be in this position again a few years down the road. Don't run
up new balances on your credit cards after you've used your home's equity to restructure
the debt.
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