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Dear Dr. Don,
I have about $77,000 of debt in a variety of credit cards, lines of credit and home equity loans. I want to consolidate them into a single debt with a lower overall interest rate. Can you help?

Thanks,
— Rich Restructures

Dear Rich,
I understand that while you’re making a good income, you have real problems living within your means. Restructuring debt will consolidate the payments, putting less pressure on your monthly household budget. Until you get a handle on spending, you’re forcing yourself to get deeper in debt with another round of spending still to come.

I don’t think you can get to a point where you can consolidate all of your debts into one monthly payment without taking on costs and risks that make it a bad decision for you financially. I’d suggest concentrating paying off overdraft lines of credit on your bank accounts and paying down your credit card balances, ideally with the remaining draw on your line of credit. Then, you might ask your lender for an increase in your home equity credit line.

At my request, you have provided additional detail on your debts, income and credit score.

Home value: $350,000.

Credit score: 719.

Annual income: $172,978.

Roth IRA: $20,000.

This table summarizes your situation:

First mortgage $230,478 3.49% 30-year fixed rate
HELOC $24,552 4.99% Still in draw period
$255,030 72.87% Loan-to-value ratio
Credit card $29,211 8.9%
Auto loan $21,843 3.89% 84 months
Credit card $12,957 8.25%
Auto loan $6,747 2.99% 49 months
Overdraft line of credit $4,746 10.25%
Overdraft line of credit $1,402 15.9%
$76,906  

You also told me about a credit card with no interest charged paid off monthly from your checking account. It is covered by an overdraft line of credit carrying an interest rate of 15.9 percent. The credit card with no interest just carries you through the card’s grace period. You’re paying nearly 16 percent on the balances. While it’s a rewards card, you’re paying a high rate of interest to get the “payoff.”

You don’t say how much is left on the home equity line of credit, or HELOC. The typical homeowner who looks to restructure debt looks first at tapping the value of their home. That’s either with a cash-out first mortgage refinancing or a home equity line or loan. You have a credit line in place. So, how much of the consolidation can it facilitate? Don’t forget that when the draw period ends, you will be required to make amortized (more costly) payments.

A conventional first mortgage refinancing will require an 80 percent loan-to-value ratio, or LTV, to avoid the private mortgage insurance requirement and cost.

You have a great rate on your first mortgage. With only about 7 percent in equity available to stay under that 80 percent LTV ratio, that’s a little less than $25,000 to consolidate your $77,000 in debts. While higher LTVs may be available, the cost of PMI has to factor in to the decision to refinance along with the higher interest expense.

A cash-out Federal Housing Administration refinancing, or a Veterans Affairs loan if you qualify, has higher LTV ratio limits. You pay mortgage insurance premiums that make these options expensive alternatives. If you’re convinced that you want to have a single payment, these are likely to be your best options.

Your car loans are at reasonable interest rates. Consolidating car loans in mortgage debt means you would take up to 30 years to pay them off. The car won’t last that long. That represents over a third of your consumer credit balances that don’t need to be restructured.

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