Question about Home Refi and rolling in cc debt... (insurance, loan, interest rate)

[mrstxcop]

Hello all...

DH and I will be in our house for 2 years in Oct...

We put $65k down, so we have a good amount of equity built into the home already... The home is appraised at $245k but we owe $156k

We took a 30 year mortgage out with a 6.25 interest rate... Our payment is $985 a month (we pay our taxes and insurance on our own)

Today we went and filled out an application to refi the house to another 30 year mortgage but with a 4.25 interest rate...

The loan rep. asked if we wanted to roll in any credit card debt... We have apx $19k in cc debt...

From the numbers they ran they qouted us a payment of apx. $955, this is at a slightly higher rate than 4.25, apx 4.75, since we would be rolling in the cc debt... So we would only be saving $30 a month, but we would have no debt other than the house payment, utilites and our cars...

Given all of the above info, I am wondering if rolling in the cc debt is a good idea or not... I mean, it sounds great, but I am not sure if stretching the cc debt out into the 30 yr note is smart or not...

Any advice or thoughts would be appreciated...

[VictorBurek]

Who says you have to stretch the credit card debt out over 30 years? If you roll the CC debt in with the mortgage, couldn't you continue to send what you were sending to the credit cards to pay them off but instead of writing a check to pay the mortgage and another to pay the credit card, you write one check to the new mortgage for the total of both?

By consolidating the debt, you shift the interest rate from a revolving rate probably near 20% to a tax deductible rate of under 5%.

I think it is wise to consolidate and put an end to the credit card debt. However, one huge thing you must do if you decide to do this. GET RID OF THE CREDIT CARDS.

[Jan Olivier]

Originally Posted by VictorBurek

Who says you have to stretch the credit card debt out over 30 years? If you roll the CC debt in with the mortgage, couldn't you continue to send what you were sending to the credit cards to pay them off but instead of writing a check to pay the mortgage and another to pay the credit card, you write one check to the new mortgage for the total of both?

By consolidating the debt, you shift the interest rate from a revolving rate probably near 20% to a tax deductible rate of under 5%.

I think it is wise to consolidate and put an end to the credit card debt. However, one huge thing you must do if you decide to do this. GET RID OF THE CREDIT CARDS.

I would have agreed 100% with you untill about 2 months ago. What happened then is that I did some calculations for myself to proof that it would be the wise thing to do.

I was shocked to find out that I was wrong. I found out that the way a mortgage is structured causes you to pay a lot more interest even with a much lower interest rate than a credit card. That was on a 20 year mortgage. With a 30 year mortgage it will be much worse.

I calculated that it is better to use extra money to pay back your mortgage and not your credit card. If you are going to add your credit card debt to your mortgage, your monthly payment might be less, but you will be paying much much more interest in the end. That's why they asked you if you want to include it. They know they will bet getting tons of interest money out of you.

[VictorBurek]

Originally Posted by Jan Olivier

I would have agreed 100% with you untill about 2 months ago. What happened then is that I did some calculations for myself to proof that it would be the wise thing to do.

I was shocked to find out that I was wrong. I found out that the way a mortgage is structured causes you to pay a lot more interest even with a much lower interest rate than a credit card. That was on a 20 year mortgage. With a 30 year mortgage it will be much worse.

I calculated that it is better to use extra money to pay back your mortgage and not your credit card. If you are going to add your credit card debt to your mortgage, your monthly payment might be less, but you will be paying much much more interest in the end. That's why they asked you if you want to include it. They know they will bet getting tons of interest money out of you.

That is completely wrong. If you have a mortgage at 4.375% and a credit card at 23%, how can you pay more interest when consolidating with the mortgage?

[mrstxcop]

You see, that is my dilemma, I don't know which is the lesser of 2 evils in the long run... apx $7000 of the 19k is interest free... So maybe I should only include the cc debt that has interest on it and not the $7000???

Another card, that has $7500 has an interest rate of 9.9, which is also fixed and has been at that rate for years and years, this card is thru my credit union, and they have never done us wrong in the 17years we have been with them, so I don't expect that rate to go up...

We have 2 other cards that each have apx $2500 and they both have rates of 9.9 or 13.9, I need to check on those... We have had those cards for 2 years without an interest increase, but I cannot be certain that they would not increase the rate for whatever reason...

[Andrea F.]

I agree with a bit of what everyone is saying. I'd actually run the numbers and see what the difference in the TIL's (truth in lending) would be over 30 years. That way you will see the difference between what you'd pay with the interest of just the home, and then the interest of the home with the credit card debt rolled in. There are so many different ways to configure a loan that you certainly want to do what is right for you. This should have all been disclosed to you when you did the application. Do you have a copy of your Good Faith and Truth in Lending? You may want to call the lender and ask them to run the other scenario for you so that you can compare your interest costs. It may be in your best interest to just use the savings that you'll have from your interest rate reduction every month to pay towards your credit cards, and most certainly do NOT close those cards unless you'd like to drop your scores. Cut them up, but do not close them. Reducing the amount of revolving credit you have available to you by a drastic amount will not improve your credit score if that's what you're looking to do. If you cannot control spending, I suggest close the accounts that have the highest interest rates and the least time revolving. Your credit scores will need a little healing time after this if you are eliminating a great amount of the revolving credit you have available to you.
Can you tell I've given this speech a few times already today?? :-)

[suzie02]

Question is how did you build up the cc debt? Was it by buying stuff you couldn't afford or was it a one time deal like unemployment or medical bills?
People used to do this type of refinance all the time. Treated their home as ATM's and now they have been foreclosed on.

[volk2k]

Originally Posted by mrstxcop

You see, that is my dilemma, I don't know which is the lesser of 2 evils in the long run... apx $7000 of the 19k is interest free... So maybe I should only include the cc debt that has interest on it and not the $7000???

How long will this 0% last..... Is this a promotional rate? I would have to believe that it is... and at some point it is going to adjust... what will that interest rate be?

You also said:

Originally Posted by mrstxcop

So we would only be saving $30 a month, but we would have no debt other than the house payment, utilites and our cars...

I'm not sure how you can make that statement... all you have done is "hide" your credit card debt in your mortgage.

The CC rates that you mentioned are not astronomically high, but 4.75% is still cheaper than all of them.

If I were in your shoes, I would probably roll as much of the credit card debt into my mortgage that still left me with plenty of equity. I would like the piece of mind of knowing that in the worst of scenarios, I could sell my house and wipe out all of the debt that went along with it.

ALSO... I would be making LARGER payments to my mortgage every month to pay off at least the credit card portion faster... some will say this is not necessary, but again that would just be for my piece of mind.

The great thing about rolling this debt into the mortgage is that it will give you some flexibility if money is tight one month... all you'd have to do is pay the mortgage and not have to worry about the credit card payments on top of it....

FINALLY, you have to "cut up" or "freeze" those credit cards, or else you will be back to where you started in no time.

[mrstxcop]

Thank you all for your comments...

The 0% interest rates are both still good for another 3 years... As long as we continue to make the equal monthly payments the cards will be paid off at the end of the 3 years...

Some of the debt came from eye doctor visits, glasses, contacts (no vision ins) and from medical deductibles that had to be met when our middle daughter had health problems throughout the year and eventually was diagnosed with asthma...

Some of the debt was used to pay for classes for my husband to get his masters peace officer title... Some of the debt was used to start up a small direct sales business that I have had since Feb 2010...

I do not consider us irresponsible with our money considering that we were fortunate enough to put 65k down on a house... We have had debt before and paid it all off...
We have just never had the opportunity before to wrap our debt up into a mortgage, so I was trying to get some insight from people who have more knowledge in that dept. than we do...

We did get estimates from our CU with both scenarios, refi mortgage balance only or refi mortgage plus debt... Mortgage only would be 4.25% and mortgage + cc debt would be 4.375%... Difference in payments would be just over $100 a month and by paying off the cc debt with our mortgage we would still be saving $70 a month from what we are paying now...

From what I am reading I think we will go ahead and refi with our cc debt in our mortgage as well...

[Jan Olivier]

Originally Posted by VictorBurek

That is completely wrong. If you have a mortgage at 4.375% and a credit card at 23%, how can you pay more interest when consolidating with the mortgage?

What you are saying is true. I worked it out with an interest rate of 13% for the mortgage and credit interest of 22% which is more common with us. If you consolidate at the rates you mentioned and pay the amount that you paid for your credit card + for your mortgage it will be better to consolidate. The problem is that if you pay the minimum monthly instalment again as most people do, you end up paying a lot more interest than you thought even at a low interest rate.
If you aren't able to consolidate your credit card money into your mortgage and your mortgage rate is higher as with us, it is worth paying your extra money into your mortgage. Especially if it is a new mortgage as you pay off very little capital in the beginning. Paying your extra money into the mortgage then reduces the capital part faster, makes the mortgage term shorter and saves you a lot of interest over the term of the mortgage. You also reduce your amount of debt faster by paying your extra money into your mortgage.

Personally I hate a credit card so I would get rid of it fast if I had one as it also has other costs assosiated with it.