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03-17-2007, 05:51 PM
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Credit card vs loan interrest
I'm getting ready to build a new house and the credit card offers I'm getting have a lower interest rate than a construction loan or mortgage. If all else is equal (and I know that's not likely) is a 6% fixed APR credit card offer cheaper than a 8% APR construction loan or mortgage?
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03-17-2007, 08:52 PM
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I don't know much about that, but I have a question. The mortgage is tax deductible, isn't it? I don't know about construction loans. Would that be a consideration?
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03-18-2007, 06:13 AM
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A construction loan lasts about 12 months and then is converted to a mortgage. taxes are an issue but what I want to know is there a difference in math between a credit card and a loan, assuming the same principle, term and payments.
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03-18-2007, 07:10 AM
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There is a very big difference. The bank loan has a fixed interest rate. Once you sign the papers, they can't change the rate for any reason. The credit card company, however, can and will up your rate for any number of reasons including a payment that is late by as little as a few hours. Even if you make a late payment to another lender, the CC company can raise your rate with them.
I would absolutely never borrow money in this situation on a credit card, even if the rate is a point or two better.
__________________
Steve * Despite the high cost of living, it remains very popular. * Why should I pay for my daughter's education when she already knows everything? * There are no shortcuts to anywhere worth going.
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03-18-2007, 07:20 AM
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Agreed. For 2% does not seem worth it. We have considered using a 0% credit card to add an addition to our house, but I Would only consider that for such a large loan if I actually had the money in the bank or knew I Would have a good backup. You never know when something can happen - the interest rate could change without warning to something in the 13% - 30% realm - you just never know with credit cards.
Interest rates have historically not been this low for mortgages. It is smart to lock in a good low mortgage rate if you are in for the long haul. Even if you have the cash in the bank, your mortgage tax break could trump the 2% difference. Good Luck.
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03-19-2007, 03:13 PM
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What I found out is that credit card loans are figured just like any other loan, mathematically at least. The tricky part is in the fine print specifically "Payment Allocation" which means my payments would be applied to the lower APR loan and that all future charges would be at the regular interest rate.
So lets do the math! I was able to get $20,000 which would pay off my 8.5% mortgage and give me enough money to start on some of the new house. Probably take me 1-2 years to pay off which means that in my case is at least $12,000 of debt at probably 18% For someone who normally pays off their credit cards every month I wasn't able to swallow it. I suppose the sneaky thing would be to get another card for my normal transactions and not accumilate the high interest debt. So I learned a bit more about my credit card and will now go back to my normal conservative financial ways. btw If anyone is curious you can check out my house building progress (which is minimal now) at 96trees.com/blog Last edited by ferdinand : 03-19-2007 at 03:17 PM.
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