Need Opinions...
Find a Conversation
| Thu, 07-14-2005 - 6:32pm |
This is the first time I am posting to this group, but I have lurked for a couple of weeks. Anywho......I am in need of your opinions. Here is our financial situation:
Car $468.01 (8,000)
Discover $100.00 (5,000)
Master Card $130.00 (5600)
Visa $100.00 (4500)
Empire $50.00 (524)
Best Buy $61.00 (2000)
Homemakers Bal. $2400
Total Debt $28,024.00
So, I sat down to figure out how long it would take me to get out of debt with paying an add'l $300 per month to the smallest balance and snowball from there. Well, I figured it would take us until December of 2007 to be completely debt free. This is not including any income tax checks or raises or any other add'l money. It would make living pretty tight for the next 2.5 years. My husband and I are both 25 and we bought our house last July. I am a stay at home mom of two children, 4 and 7 mos. Well, my husband and I have talked to a mortgage guy about refinancing our house in order to pay off all of our debts. This is what he said we could do. We could refinance our house with a 100% loan with a fixed rate of possibly 7.5-8% for 2 years and then it would be an ARM. At that point we could move or refinance the house again. In order to pay off all of the debt and have a couple of thousand in an emergency fund, we would need to have the house appraised at 205,000. We already had an appraisal before summer began and it was at 195,000. So we decided to wait until the prime buying season was over and then have it appraised again. They base it around what has sold recently within a 1 mile radius from our house with the same features, etc. Our current loan is a 30 yr. fixed rate of 6.5% and we had financed our house at 179,000 last July 29th.
So, if we could get the higher appraised value do you all think it would be good to do that and risk what the interest rates might be in 2 years from now or just suffer through the debt pay off and keep everything the same. If we did the refinancing it would free up $1000+ per month even with the increase in the mortgage payment from refinancing. We are never going to get ourselves in debt again!! I am just nervous to do something....Please let me know what you would do in this situation. Thanks!!
Michelle

First of all, welcome to the board! I think you'll like it here.
As for the home refinance... if I'm reading it correctly, it sounds like a really, really bad idea to me.
You should know, first of all, that I am almost never in favor of rolling credit card debts into home loans. There are two main reasons for this. First of all, the vast majority (I've heard the numbers are somewhere between 80 and 90 percent) of people who do this end up back in credit card debt in a matter of months or years, only now they also have a heftier mortgage. Even if you believe you'll do better this time, the odds are against it. By paying down your debt the slow, hard way, you also learn valuable skills that will serve you well in staying out of debt and then building your wealth. Believe me, I know how easy it is to rack debt back up after taking the "easy" way out once. And I know what a long, hard process it can be to learn the skills necessary to never do it again.
The second reason I'm opposed on principal is that it puts your home at risk. Currently, if you or dh were to lose your jobs, have a major medical problem, or any other major financial catastrophe were to befall you, you might get behind on your credit cards and get some nasty calls and bad credit reports. Bad stuff. But if you've rolled all your debt into the house and can't pay it, you get all of that *plus* you can lose your house.
Aside from the reasons I'm generally opposed on principal, the particular situation you're describing seems especially perilous to me.
By refinancing at a higher interest rate, while your credit card debts might be at a lower interest rate, the entire MUCH larger mortgage balance will now be at a higher rate than it was. In terms of monthly interest charges, I suspect this means that you'll pay MUCH more in interest rates each month. In addition, you will spread the paying off of your debts over 30 years instead of the 2.5 it would take you to pay them off the old-fashioned way.
Furthermore, since it is an ARM, in 2 years your rate could skyrocket. Refinancing is not a good option, because you would have to pay closing costs all over again, probably close to ten grand based on the value of your home. Combined with the closing costs for the first refinance, your closing costs alone could total more than your credit card debt.
And, to top it off, the terms sound really poor. Usually the attraction of an ARM is that the initial interest rates are lower than the current going rates. 7.5%, on the contrary, is quite high in today's environment. Secondly, most ARMs that I've seen nowadays give you an initial fixed interest period of 5 to 7 years--2 years is really, really low.
So, as a bare minimum, I urge you to shop around for other mortgage options, as this one does not sound good.
But beyond that, I would also look at your plan again and see if you wouldn't rather just pay the debt off. I know 2.5 years sounds like a long time, but it's really a pretty quick turn-around for that amount of debt. I started at roughly $35k and now, three years later, I'm still plugging with roughly 1 to 2.5 years left, depending on a variety of factors. And that doesn't even count my car.
Anyway, obviously this is a decision you have to make for yourself. And you've already taken an important first step by coming here, totalling up your debts, and considering your options. The fact that you've got a budget already written out shows that you're really ready to get this show on the road. Good for you for taking the initiative.
Stick around here and you'll get tons of good advice and helpful thoughts and support.
Thanks for joining us,
Heather
ITA with the previous posters. Bad idea all the way around.
Kellie
We also refinanced our house to pay off debts when I decided to work part time & stay home with my daughter during the day. We now have a super high mortgage payment (48% of our income)and we are back in cc debt.
So for my honest answer, I think its a horrible idea to put your house on the line to pay off unsecured credit card debt.
I am sure if you stick to a budget and snowflake and extra money you come across, you can pay off your debt, before December 2007. Refinancing may seem like an easy way out, but really your still paying the money off, just in 30 years and paying more interest.
Paying off debt is never as easy as it was to create, but this board is full of great intelligent people.
Shannon
Shannon
Refinancing your house at 100% (and at slightly "inflated" valuation) is a dangerous thing. If the housing market drops just a tad, and if you have to move and sell your house, you could very easily ended up owing the bank.
I think getting out of debt is a bit like weight loss. If you go on a crash diet (using home equity loan to pay off credit card debt), it may feel great at the moment, but since you never learn good eating habits (budgeting, etc.), your will most likely regain all the weight and some more (raking up credit card debt plus a huge mortgage).
I don't think I'd consolidate all the unsecured debt with a HELOC. The credit card companies can (and do) make life ummm, 'interesting' at best, but if it's tied into the house-the house can be taken.
The strange thing I've found along the way is that when I am doing the right thing money-wise, money seems to almost throw itself at me--which of course gets used for a snowflake! ;) Seriously, it may not take as long as you think because of things like that.
If you put your debts from smallest to largest, you'll probably be able to knock off the Empire one fairly quickly, which will free up at least $50 to roll over onto the Best Buy.
You can do this!
Lisa
If you pay your debts down the way you planned by snowballing your debts, you'll be done paying them off in under 3 years.
All my best,
Danni
WOW!! Thanks everyone for yor replies. I definately had some reservations about doing the refinancing and you all have given me some great things to think about. I would definately have been worried if the market would take a slight drop or if the rates would skyrocket for some reason and it would jeoperdize our home.
Just to clarify to some, I think some of you thought I meant an equity line or 2nd mortgage, but it wasn't that. It would have been a completely new loan.
The thing that is hard is the fact that it would free up about $1000 a month to put towards savings. Plus, we have always planned to live here for only a few years. We really only wanted to live here for two and then try to go back to our old neighborhood. I can totally see where everyone is coming from because I have had some of the same thoughts. You know what is funny? I would have totally thought people would be like "Yeah. Do it!" You know like anything to get out of the debt trap. My hubby wants to do it because of the fact that we would have $1000+ extra per month and we would be completely debt free except for the house and our credit score will go up(it is at 685 for me and 710 for him). Plus he wants to move soon anyway...so he isn't too concerned with the mortgage going to an ARM after 2 years. But, he says that he will do what I feel is right. So I guess we will just wait and see what our home will appraise for at the end of summer then get some figures and go from there. But, starting August 1st we are going to start the debt snowballing. I am going to wait and get the full picture and then hopefully I will make the right choice for our family.
Seriously...thank you very much for all of your opinions! I told my hubby what everyone here has said and I am thinking everything over.
Michelle
I agree with firstamendment. I did understand that it was a new loan--which actually makes it worse, because you are refinancing your entire mortgage at a higher rate, which is a very expensive thing to do.
And what if, in two years, the housing market is less hot than it is now? If the market dips even a little bit, you're stuck in a mortgage for more than your home is worth, and no way to get out of it because you can't find a buyer who can pay you enough to get out of your home and into the house you want to be in. Meanwhile, your ARM is threatening to go up, and you might not even be able to refinance because your house might not appraise for enough. And even if you can refinance, it will cost you closing costs all over again, getting you stuck deeper in debt to your house, and even further out from ever getting out from under it.
Bad, bad situation. I'd hate to see that happen to you.
I know the extra cash flow is appealing. But in the long run, you will suffer. It's like every other kind of debt--you'd be financing today's enjoyment at the cost of your tomorrow.
Take the time and effort to pay this down the old-fashioned way, and along the way you'll learn lots of skills and develop lots of habits that will help you to build true wealth that you will always be able to rely on.
And in two years, you'll be able to sell your home and take a nice, hefty chunk of equity with you to your new home. Or, if the market does dip, you'll still have enough equity to get out from under it and take advantage of the market dip in purchasing your new home in your old neighborhood.
It's tempting to choose the cash flow, I know, but that's how market sharks get you. The promise of cash flow now (buy now, pay later!) at the expense of your long-term financial health is glittering false gold.
And, like I said, if your heart is absolutely set on this course of action, as a bare minimum, shop around. A home equity line might make more sense, as at least it would not roll your existing lower-interest mortgage onto a higher-interest mortgage. Or you might find better terms on a complete refinance--provided your credit is decent, it is hard to imagine that you can't find better terms, as the terms you describe are pretty poor. And if your credit *is* decent, you'd be better off rebuilding it for several months until you *can* qualify for better terms.
Of course, these are all decisions you must make for yourself. I just would hate to see you in a bad place in a couple years, and I fear that might be where you'd be heading if you go for the refinance.
Let us know what happens, and we'll look forward to hearing more about your debt-repayment journey.
Blessings,
Heather