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Smart use of cash-out refinancing
Dear Money Matters,
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 $50,052. We would like to pay all of our debts. Is it
wise to borrow more money to pay credit card debt?
Zita
Dear Zita,
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 debt.
For one thing, folding 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
in the mid-teens or even higher, that can prove a huge overall savings
right there.
Another plus to adding on credit card debt to a refi
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.
Yet another plus, albeit one with less importance,
is convenience. Rather than having to cut check after check, consolidating
your debt into one mortgage payment boils your obligation down to
a single bill. If you're scratching 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 on Bankrate's mortgage
calculator and, by my figuring, your monthly payment comes out
to $405. That's pretty dang skimpy.
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 illustrate, 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
laying out in credit card payments.
So the numbers make sense, to my way of thinking.
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. (See the story, "Loan
consolidation? No!" for details.) Too many people, according
to this view, 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 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.
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.
-- Posted: Aug. 9, 2002
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