Mortgage Refi for Debt Consolidation

[yagersmom]

Hello. Please help. We currently have a 1st mortgage with a balance of 233,000. The loan is a 30 year fixed at 5.5%. The home was purchased in 2003 with an appraised value of $300,000. The home is now valued at $450,000. We are about to sign (in 2 days) on a cash out refi and we are having some concerns about whether or not it is the right thing to do. The new loan would be $320,000 for 30 years fixed at 5.75. We would pay off our current first and would receive about $96,000 to pay off debt and do some home improvement. We have $25,000 in credit card debt ($8k at 0% until 12/05 and $17k at 2.9%) and a personal loan of $50k from family (at 0%). We had planned to pay off the above $75k and use the remaining $20 cash for home improvements. The best cash out refi that we can find is at 5.75% for 30 years. This will increase our monthly mortgage payment about $300. It will be nice to be virtually debt-free but we are second guessing our choice now and wondering if this is the right thing to do. Please let us know what you think would be in our best interest. By the way, we do not plan to stay in this home forever - more like anywhere from 2-7 years.

Thanks.

[terry1156]

In my opinion it's always a bad idea to refinance unsecured loans into a secured loan before you have solved the problem of why you have the debt in the first place. If you don't address that issue, you're going to have the same credit card debt plus a larger mortgage loan in a year. here are a few questions.

If you can afford an extra $300 on the mortgage loan, why can't you pay down the credit card debt?

If you are going to be moving, why are you going to put $20,000+ into home improvements? Unless they are improvements specifically to increase the value of the house, they aren't worth it. Even if they are, wait until you are ready to move to do them - they will be newer and with nobody knowing what is going to be happening with housing in the next few years, a safer way to approach it.

I think you'll put yourself in a very leveraged situation by making the move you're considering without addressing the issues that got you here in the first place. Address those frst, then consider your best move.

[yagersmom]

Terry -

Thanks for the reply and the advice. I need to say that I do agree with you re: our debt and how we got there in the first place. Well, most of it is a long, drawn out story but the good news is that we have not used our credit cards in over 2 years now so as far as ensuring that we don't continue to incur more debt, we're on the right track. Plus, remember that $50K of it is a loan from my parents that we are not obligated to begin payments on until 2009 - we just want to get it out of the way now. Also, as for the improvements, we want to do a few things to the home that will increase its value and at the same time allow us to enjoy the home more for the remainder of the time that we'll be here - could be 2 years, could be more. The improvements will benefit us now and later when we go to sell. I appreciate any further input you may have. Thanks.

[terry1156]

It's difficult to give suggestions without seeing your entire budget -- if you are willing to post that I know that everyone here can not only give you their opinion on whether or not you should go for the refinance, but also probably find a number of places where you can save money (the members here are great at finding those) to put you in even a better financial position.

Since at this point we don't have your entire budget, I think you can get by without taking out the loan. While this is not the "easy" alternative, it will put you in a much stronger financial position when you do decide to sell the house and I think you'll be glad when that time comes that you did. Make a few sacrifices now and be much more financially secure in the future.

I would put off the home improvements for a year unless they are absolutley necessary for the functionality of the house and put away a bit on the side toward those that you want the most. This will get you in the habit of saving for what you want as opposed to getting what you want and worrying about how to pay for it later. I think you'll also find that by doing it this way, you'll appreciate and enjoy the improvements you make to a much greater extent.

I would then put every penny I could save into Emigrant Direct (or some other saving account that is paying more than 3.5%) and pay the minimums on the credit cards while building up a fund where you can pay off the cards right away if the rates go up.

It really doesn't make sense to trade $25,000 in unsecured debt where you're paying less than 3% for secured debt your paying 5.5% for. If you were paying 24% interest on the cards, I might be able to see an argument there, but not in this case.

With rates as good as you are getting on the cards, obviously you have kept up on the payments and your credit scores are good. That is an enviable position to be in when trying to reduce debt. A big congratulations there.

If you can do the debt reduction without the refinance, it will mean when you decide to move, you'll have an extra $100,000 or more in equity - when you look at it that way, cutting back a bit for 2 years makes a lot more sense.

[meaghanchan]

I'm certainly not one for yelling 'HOUSING BUBBLE!" and scaring people, but you do need to consider what's going to happen if the housing market fell. What if you had $320K out against your house- and it became worth less than that?

The other thing to consider is that most home improvements don't add as much value to the home as they cost.

It's great that you haven't used credit cards for 2 years! Congratulations on that!

[Tree0164]

I wouldn't do the refinance. I think you would be digging yourselves into a bigger hole financially. Transfering unsecured debt to secure debt can only get you into trouble if you lose a job or have an emergency.

Post your budget.

What are your interest rates on your current credit cards?

I know you may want to pay off your parents first. I would focus on getting that paid off. No one wants to have a family loan. Mixing family and money is never a good combination.

You can not afford home improvements at this time unless they are really an emergency. Needing a new kitchen isn't an emgerency.

[34saving]

Looks like you've had 50% growth in two years ($300,000 ---> $450,000). I'm not a "the bubble is going to burst" kind of person, but what goes up 50% in two years can certainly go down 30% in two more years. I'd be very leary about tapping that equity, esp. since you don't plan on staying for very long. Maybe we can find some other options for paying down the $25,000. In the meantime, it sounds like the family loan doesn't "come due" until after you've planned to move, so why not pay that off when you sell your house? BTW, most people think that long term interest rates aren't going to take off, so doing a refi. a year from now after you explore other options shouldn't cost you much more . . . BTW, congrats on not using the cards and getting a bargain on your house!

[Snoopy2645]

Well if the refinance is tommorrow & you are having second thoughts on it I wouldnt do it!!

I was in the same situation as you well kinda we were gonna refi. & pay off unsecured debts this was 2 yrs ago. I backed out at the last minute I was like you I had something telling me not to do it. Trust me the bank will push it but only to improve thier own pocketbooks not yours!!! But keep in mind they wont die if you dont do it!!


Well I started going to the library & reading debt free books I transfered all ccs to 0% interest at the time I was expecting my 3rd baby any day so I couldnt just go get a job but I mystery shopped cut everything to the bare bone sold stuff on ebay. Then I got a pt job to help out shortly after I had my baby now we are debt free & our house will be paid for this year!! And we are saving a little too. So IMO I took it into my own hands & thrilled I did everything will be paid off this year. We quit buying everything except food for along time while CC's got paid for.

I agree with the others it scared me to death to roll unsecured debt into my home I couldnt let my family end up homeless KWIM The cars are another thing to look at I sold my car got a much nicer one for the same price & more fuel efficient also so that has saved me a ton!!

[jmjj215]

I echo the advice already given and await the budget

What you're thinking of doing is riskier than what most members feel comfortable with. As a general rule, the forum members will error on the conservative side with personal finances.

[BAGAGT1]

Quite bluntly, I think you are making a mistake. You have $75,000 of debt, at a good interest rates. You didn't mention if you have any car loans, or any other kind of debt, but assuming you don't have any other debt and you have a good income stream, you can pay this down without refinancing. First, skip the home improvements, let's get this debt paid down first before we consider making unneccesary improvements to the home. If I were you, I would consider even picking up a part-time job to help pay for this debt down.

[tripods68]

Sorry to bring back old thread. But as I was reading this one. I'm curious to know what happen to yagersmon with today's current market conditions. Has anyone follow up this?

[maat55]

[quote]

Originally Posted by terry1156

In my opinion it's always a bad idea to refinance unsecured loans into a secured loan before you have solved the problem of why you have the debt in the first place. If you don't address that issue, you're going to have the same credit card debt plus a larger mortgage loan in a year. here are a few questions.

I agree 100%.