Refi HELOC to avoid a debt time bomb

Dear Dr. Don,
My husband and I have a $173,000 home equity line of credit, or HELOC, carrying an interest rate of 2.25 percent. It has a draw period coming to a close in March 2016. Our monthly payments are to jump at that time from $300 to over $1,000. What are our options for refinancing these funds?

Is it possible to consolidate other debt when we refinance our HELOC? Should we take out another HELOC or get a home equity loan? We have approximately $190,000 of equity in our home, which has been appraised at $405,000. Our credit scores are decent, with both above 700.

Unfortunately, we have also accumulated $27,000 of credit card debt during the tough years including the recession. We always pay more than the minimum each month — $750 in total payments. We’re trying to pay the debt off, but it is a slow process. Is it possible to consolidate credit card debt into a new loan that also covers the HELOC? Could this also include other debt, such as a car loan?

We also recently refinanced our home, shifting from a 30-year mortgage to a 15-year carrying a rate of 3.88 percent.

Our monthly payments remain the same as before.

I wish we had included the HELOC in our recent refinancing, but we didn’t. Any advice on how we should proceed to consolidate this debt and prepare for the end of the draw period?

Thanks so much!
— Troubled Tina

Dear Tina,
Since you just refinanced and you have a recent appraisal, it appears that you don’t have enough equity in the home to roll the credit card debt and car loans into a new home equity loan or line of credit.

Between the $215,000 you owe on the first mortgage and the $173,000 you owe on the HELOC, you have mortgage debt equal to about 96 percent of the value of your home. There’s no room to add another $27,000 to the mix. No room for the car loan either. The fact is that it won’t even be all that easy to find a lender willing to refinance the current HELOC.

While I’d love to point you toward an easy solution, I don’t see one immediately available. The good news is that with about a year and a quarter until the HELOC switches from interest-only to an amortized payment, your 15-year mortgage payment will help you to gain more equity in your home.

I’d suggest that you try to be as aggressive as you can paying down that credit card debt. That likely carries the highest rate of interest. While we can argue that you should focus on reduction of the mortgage loan balance to build equity, reducing the interest expense on the credit card debt is going to make dollars available in your monthly budget.

Your goal should be to arrive at the point where you can either refinance the HELOC or afford the amortized payment on the existing HELOC when that big shift comes in March 2016.

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