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January, 2019:

Home Refinancing – Part 2 Should I Refinance to Consolidate My Debt?

Another reason one may wish to refinance their mortgage is to consolidate debt.  If you have $10,000 of credit card debt that you’re paying, for example, 20% interest on, then that means that you’re paying $167 in interest every month, before you even touch the principal.  Ouch!   But if you roll that debt into your home mortgage that is being charged at, say, 5% interest, that $167 of monthly interest becomes $42.

Wow, that sounds great!  So what’s the drawback?  Well, the $10,000 of credit card debt in the first place.  How did that happen?  If it was for a one-time expense like a medical bill, no problem. 

But if that debt was racked up by a big screen TV or a 2 week vacation, you’ve got a leak in that wallet.  In which case, refinancing isn’t going to help.  The most common scenario in this case is that $167 payment goes down to $42, exactly as planned.  But then another vacation creeps into the mix before the debt is paid down.  A new video game system is released, and new games to go with it.  Aw!  Look at that puppy in the pet shop!  

Next thing you know, that $10,000 credit card debt has reared its ugly head again, and now you have an extra $10,000 of mortgage debt to boot!  So instead of $167 down to $42 a month, you’ve gone from $167 to $209!

The solution to this is to cut up that credit card and not apply for another one.  Anything shows up in the mail that feels like there’s another card inside gets thrown out without being opened.  But even that is only fixing the symptom and not the underlying problem.  We would highly recommend getting your financial house in order (become accustomed to spending less than you earn) before refinancing your home to consolidate debt.

 

Home Refinancing – Part 1

This post will be the beginning of a series that examines whether or not it is wise for you to refinance your mortgage. 

First things first, why on earth would you want to do such a thing?  Well, there are several good reasons, and the best of which is to reduce your interest rate.  

If your mortgage is fixed rate, and more than six or seven years old, you are probably paying a lot more in interest on each payment than you could be.  The general idea is that if you can save two percent or more on your interest rate by refinancing, it is worth the time and effort to do so.   A lot of finance outfits now recommend that a reduction of 1% is enough of a cut to refinance, but obviously we shouldn’t go around blindly trusting guys that get don’t get paid if you don’t refinance with them.

But there are real reasons why that rule of thumb is dropping. As we have covered in this blog previously, the Federal Reserve has dropped interest rates to an all-time low.  They have also gone on record as stating that they plan on keeping rates unchanged for a long time to come. (hellllo, Japan!)  That means that a large part of the short term risk inherent in using variable rate mortgages (you pay a lower rate now, but if interest rate rise, so does your mortgage rate) has been removed.  

So that means you can save a lot on your interest rate if you refinance your mortgage now with a variable rate for 5 years.  It requires a little vigilence on your part because you and only you will be responsible for keeping track of when to pull the trigger.  Never expect your bank to look after your interests in this regard, because your gain is their loss.