Please Critique My Idea

[Bob B.]

The problem here is what happens if the tenants move out (or stop paying rent)? Can you afford the existing loan AND the new loan? You could stop sending payments to the family at that point but will that be enough?

The hope is that with the new borrowing we would be put into a position to be able to list the house at current market value, and sell more rapidly.

[Bob B.]

I don't know what your income is, but speaking from experience, unless you qualify for both mortgages *without* counting the rent coming in from the second property, you won't be able to get another mortgage.

Additionally, I think it's pretty strongly discouraged to roll unsecured debt into a mortgage. Sure it would help you because you aren't currently paying down your mortgage but if you do find yourself in financial distress again, you're going to owe more than the house is worth between the mortgage and family. I understand your desire to repay them, but I don't think its a smart move.

Household income = 65K

[Bob B.]

Just to be semantically correct, you aren't actually paying off the consumer debt. You are just doing a balance transfer to the new mortgage.

I'm assuming there is no official record of the family loans. If there is, that would make getting a loan impossible.

Is the rent on home 1 covering your costs? If not, rather than paying down the loan, I'd probably hold that money in reserve in case you need it. Then when the house sells, you can use it to cover the balance on the loan.

Do you have a 6-month emergency fund?

Is there anything that was purchased with that 14K of CC debt that could be sold to recoup some of that money?

Correct, no official record of the family loans.

Rent on home 1 = $900/mo. so, covers 80% of costs.

EF = $1,650 so, no not 6 months.

Basically, no. We haven't added to that 14K cc debt since August 2008. And, when we were piling on CC debt, it was on eating out, clothes, gasoline, a computer that is now 4 years old, and my Master's degree. No new furniture, stereo, plasma TV or anything like that.

[disneysteve]

I think it's pretty strongly discouraged to roll unsecured debt into a mortgage. Sure it would help you because you aren't currently paying down your mortgage but if you do find yourself in financial distress again, you're going to owe more than the house is worth between the mortgage and family.

This is true. Most advice says not to convert unsecured debt to secured debt. The main reason for that is that typically people haven't changed the bad behavior that got them in trouble in the first place. The majority of home owners who used equity to pay down credit cards proceeded to run the cards up again and found themselves in even worse shape than they started.

In this case, if OP has truly reformed the money management, I'd be okay with it. Heck, my wife and I have used home equity to pay off debt - student loans and a car loan - years ago.

The problem here is what happens if the tenants move out (or stop paying rent)? Can you afford the existing loan AND the new loan? You could stop sending payments to the family at that point but will that be enough?

[riverwed070707]

I don't know what your income is, but speaking from experience, unless you qualify for both mortgages *without* counting the rent coming in from the second property, you won't be able to get another mortgage.

Additionally, I think it's pretty strongly discouraged to roll unsecured debt into a mortgage. Sure it would help you because you aren't currently paying down your mortgage but if you do find yourself in financial distress again, you're going to owe more than the house is worth between the mortgage and family. I understand your desire to repay them, but I don't think its a smart move.

[disneysteve]

1. Pay off all consumer debts (credit cards and van loan), freeing up about $760 in monthly cash flow.
2. Pay Mort. 1 down by $28K, so it is not under water at current market value.
3. Pay the rest to family members (about 12% of what we owe them)

The $760 in new monthly cash flow would be split between the new mortgage, and family members. (assuming new morgage at about $300 per month).

Just to be semantically correct, you aren't actually paying off the consumer debt. You are just doing a balance transfer to the new mortgage.

I'm assuming there is no official record of the family loans. If there is, that would make getting a loan impossible.

Is the rent on home 1 covering your costs? If not, rather than paying down the loan, I'd probably hold that money in reserve in case you need it. Then when the house sells, you can use it to cover the balance on the loan.

Do you have a 6-month emergency fund?

Is there anything that was purchased with that 14K of CC debt that could be sold to recoup some of that money?

[Bob B.]

After I posted, I thought a better option might be to pay off just enough consumer debt to free up the $300 per month cash flow needed for the new mortgage. Maybe the 20.99% card, the 8.9% card, and maybe the 5.32% card. And the rest of the $57,600 go to family members.

[Bob B.]

I've posted about my debt situation several times in the past. My wife and I are considering a monumental change. Before we go through with it, I'd like some comments from this forum. First, my current situation:

Balance Int Monthly Payment
Mort. 1 $104,165 6.25% $1125 (PITI)
Mort. 2 (A) $30,000 0.00% $0
Mort. 2 (B) $40,000 0.00% $0
CC1 $7,931 8.90% $159
CC2 $2,706 4.25% $140
CC3 $2,088 5.23% $195
CC4 $1,709 20.9% $60
Van Loan $6,550 4.20% $210

We owe two different family members a combined $70K on the house we currently live in. Our old house is rented out, and for sale, We are currently $25-30K underwater on the mortgage. Our original agreement with family members is to pay them when our old house sells.

My proposal is to take out a 30 year morgage on the house we're currently living in. The house is worth about $72K. At 80% L/V ratio, we'd borrow $57,600. I would use that money to:

1. Pay off all consumer debts (credit cards and van loan), freeing up about $760 in monthly cash flow.
2. Pay Mort. 1 down by $28K, so it is not under water at current market value.
3. Pay the rest to family members (about 12% of what we owe them)

The $760 in new monthly cash flow would be split between the new mortgage, and family members. (assuming new morgage at about $300 per month).

We have become much more financially disciplined over the past 18 or so months. I truthfully don't see us falling back into the credit card debt problem we've had in the past.

Even though our family members have not asked to be repaid yet, we feel an obligation to begin paying them back.

In the future when our house sells, we're going to have to come up with the $25-30K somehow.

Sometime after the original house sells, we would plan to refinance our new mortgage to a 10 or 15 year payoff.