debt

Refi second mortgage to pay off card debt

Steve Bucciq_v2.gifDear Debt Adviser,
Does anybody ever refinance a second mortgage? Our original mortgage is at 5.625 percent and we are fine with it. Four years ago, I took out a second mortgage when my husband went to graduate school, and I was faced with paying all of the bills by myself. The second mortgage is at 12 percent interest, and I feel as if we are not making any gain. We have incurred other credit card debt since then but are able to make payments, although things are very tight. Please offer advice. Thank you.
-- Carla

a_v2.gifDear Carla,
First and most importantly, stop it, stop it, stop it or you'll go blind. Stop what, you say? Stop adding debt to your credit cards! If you are making purchases with credit that are not paid in full each month, it is likely you are living beyond your means. It is very difficult to become financially secure if you don't learn how to live within, or, it is hoped, well below, your means.

Also, this is a very unstable time to be carrying credit card debt. I hear from my readers almost everyday that lenders are reviewing credit card accounts and routinely lowering limits, increasing interest rates or accelerating payments. Credit cards were not designed to be long-term financing instruments, and those using them for that purpose are taking a big risk today.

Next, yes, it is common for folks to refinance first and second mortgages. Many refinance their second mortgages so they can take cash out to pay off unwanted credit card debt. I might recommend that you look into the pros and cons of doing the same if you end up refinancing your second. However, what you need to know ahead of time is that when adding nonsecured debt to a mortgage, it is necessary to have a plan in place to pay off that part of the new loan as quickly as possible.

The other thing I want you to keep in mind when paying off your credit cards with a second mortgage refinance is that doing so does not give you "carte blanche" to go out and rack up balances again. Remember, we agreed in the first paragraph that for the sake of your eyesight, you are going to live within your means, and to do that you will only use credit for those purchases that you can pay off at the end of the month when the statement arrives or at most within 90 to 180 days.

Before you start shopping for the best deal to refinance your second mortgage, I recommend getting a copy of your credit reports from all three bureaus at Annualcreditreport.com. You can access your reports free at this site once a year. Review your credit reports to assure that all items are accurately reported. If you find a listing that is not accurate or out of date, dispute it with the bureau or creditor that reported it. If you have any unpaid defaulted or late payment accounts, pay them. Your goal is for your reports to be in the best shape possible before you apply for a loan. You will also want to order a FICO score. Because each bureau will have slightly different information about you in their files, you should get a score from each to know where you stand.

Do some research online to determine what interest rates are being offered in your credit score category for the loan or line you believe you want. Although lenders take more than your credit score into account when underwriting a mortgage, knowing your score will help you know whether or not the lender is offering you a fair interest rate. Do your shopping for a loan within a month's time and your credit score will not be negatively affected by the inquiries. So as not to unfairly lower a mortgage shopper's credit score, all mortgage inquiries made within a 30-day period only count as a single inquiry. Lastly, don't borrow more than you can realistically afford after budgeting to establish an emergency savings account, so you won't need to use the cards to supplement your income going forward.

Good luck!

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