Note: This is a paid review
With real estate prices melting down in the United States, I’ve seen fewer and fewer commercials for the mortgage refinance companies on TV. But so long as you have equity in your house and your mortgage interest rate is substantially lower than your credit card interest rate – you should look into consolidating all your debt into one tidy payment if you never seem to make head-way on your credit card debts. This is also known as a home refinance.
Here is the basic concept:
Let’s suppose we have someone with a $300,000 home and an outstanding mortgage of $200,000. If you are paying 6% with 25 years remaining on the mortgage your monthly payment is about $1,169. Let’s also assume that you have $30,000 in credit card debt that you pay 19% interest on. So far you have only managed to pay the minimum monthly payments, but you are no longer adding to your debts as you have finally established a budget that you stick to so that you don’t keep getting yourself into more trouble! Your monthly credit card payments are about $475 – and remember, that’s just to pay the interest – you aren’t making a dent into the principal.
When you look into refinancing a home or any home loans – you may find that if your credit is good you can take advantage of the dropping interest rates and perhaps your refinanced mortgage will be for 5% instead of 6%. If you consolidate that credit card debt into your mortgage, while maintaining your 25 year amortization you will now have a 25 year mortgage of $230,000 which at 5% interest equals a payment of $1,344. This represents a monthly savings to you of $300.
Understand that this really only works if you don’t get yourself into the same mess once you free up that cash-flow. It’s not "found" money so much as it is a chance to set yourself a little straighter. If you took $200 of the freed up $300 and applied it to your mortgage payment could take about 6 full years off your mortgage and you would still have $100 more per month to either ease the strain of the monthly bills or just ensure you don’t rack up any further credit card debt. Perhaps it should be allocated to an automatic savings program that allows you to save up for something instead of financing it.
Do the math, and explore your options. You can get some quotes on home refinance at www.refinance.com. Note that you should talk to your financial planner about all your options, not just this one. Money management is as much about behaviour as it is numbers!
If you like this blog, you might like my book:
RRSPs: The Definitive Book on Registered Retirement Savings Plans