We got the cheque from the lawyer today - we have officially re-financed our house, and by doing so, consolidated our not-inconsiderable debtload at a very low interest rate (well, almost - just have to pay off the debts from the re-financed money). We agonized over this, trying to examine it from every angle, and it looked like a good deal to us.
We bought an undervalued house before the real estate market here went insane, so we had a very low mortgage on a house that would (theoretically) sell for more than twice what our mortgage was. It put us in a position where we couldn’t fix this house up and sell it to move up the ladder, because all the other houses we could buy are priced out of our range now, but this re-financing works out to almost what we would have paid for our second house, had we been able to stick to the plan. I guess you could say we sold our house for a great profit and re-bought it from ourselves for a great price. Hmm. I’m getting confused now.
Once it’s all paid off, we’re cancelling credit cards and bank accounts and simplifying all of our finances. The thought of having only a car payment and two mortgage payments most months, instead of that and four large debt payments as well, is just about making me giddy.
I have thought about doing this too, but I admit I don’t understand how this works. You borrow your way out of debt? Don’t you just end up paying your debt over 30 years instead of 10 (or however long it would have taken you before?)
When you add up the total payments over the years, are you really saving money or just spreading it out more?
(I am not trying to be a downer, I am really wondering how this works to people’s advantage as we have debt too.)
You pay off debt that is subject to a high interest rates (such as credit card debt) with money you borrow secured by the equity in your house, a kind of debt that is nearly always at a more favorable interest rate.
The total amount you owe isn’t (much) changed by this, but the monthly payments are lowered. To put it another way, the same monthly payments will retire the debt sooner.
Good for you, featherlou! Thanks to the market in Calgary, we did the same some months back. Paid off the line of credit, the (gaah) credit card bills, and now have enough to keep me in school. Assuming I don’t get too fond of the local pub, of course!
Naw, I’m responsible enough. And I must say it’s easier than remembering all the different due dates during the month, as well as the minimum payments. We got a good rate, and in spite of the increased mortgage, it’s a damn sight easier to pay, we find.
That’s good to hear - like I said, we tried to think this through carefully, but I still have a few fears that we’ve made a bad decision (like you said, Velma, basically borrowing to get out of debt). We did some calculations before going ahead with it, though, and the amount of interest we should save in just two years made it more than worthwhile. If we can be really disciplined and make extra mortgage payments, we can minimize the total interest we pay over the life of the mortgage. Making 26 payments a year (rather than 12) cuts years off our mortgage alone.
Another factor is that at high interest rates, the climb out of debt is so much steeper. Paying on debts at these higher interest rates is like running in place. It’s extremely disheartening to try to pay off large high interest balances; we found that we were getting nowhere with them, and we were (mostly) doing everything right.
Another way of looking at it, Velma, is low-interest debt consolidation, which most financial advisors advise as the first step to getting debt under control.
I should say, we pay 26 proportional mortgage payments per year (every two weeks, which works out to two extra payments per year), not 26 full monthly payments. If we paid 26 full month payments a year, we’d get that sucker down in no time!
Exactly. We were constantly trying to keep up. With the card maxed at an 18% rate, every month, thanks to interest, we had to make good on:
– the interest for that month
– the principal for that month
– anything over the card’s max
It was @#$% difficult. Folks, a piece of advice: do not put your professional school tuition on your credit card, unless you know you can pay it off at the end of the month. My classmates were able to buy brand-new computers if they needed them, while I was eating peanut-butter crackers. No student loans for me; I own a house. No scholarships either; I’m not smart enough. Thankfully, my house appreciated, and I could borrow against it. (Now I get frozen dinners and the occasional beer. )
we did that too, only to use the cash to pay for an addition to the house. We did not use a construction loan and paid the builder ourselves. Still we upgraded the original construction plan, added a second story covered balcony, added windows and decided to re side the entire house and added gutters as well. Then we ran out of money for flooring and window treatments. So that went on the credit cards. Now we have cc debt where before there was none. I AM APPLALLED AT THE THOUGHT OF PAYING CC INTEREST.
Before we had a 15 yr mortg loan in which I paid hundreds every month extra to the principal, it would have been paid off in just over 5 years before we cashed out our equity.
Now we have an extra big mortgage for 30 that I cannot pay any extra principle on until we pay off credit cards. I am playing the cc shell game, shuffling for an 0% APR and trying to beat the clock before retroactive interest kicks in on the cc totals.
This means I cannot use the cards anymore, nada,non, forgeddaboutit. I have a year at 0% apr to beat down this debt, but the cards want me to spend more. they send me checks, increase my limit trying to entice me to purchase more more more! And those interest rates thay are offering after the promo suck!
So, citi card, cap one, discover and chase thanks for the use of your cards, But you can’t catch me!
It’s tempting. My husband has been laid off for almost 6 months and things were so tight that I was laying out all our options, and starting to make a list of bills that I could ‘let go’ of and not pay for a month or 2 if things got really bad. I figured if I didn’t pay the credit cards for a few months, my credit would take a hit but nothing really horrible would happen. If I put all that debt on the house and then couldn’t pay it, now my house is on the line. It’s the move from unsecured debt to secured debt that makes me nervous. But I can see the benefit from moving to lower interest rates. And I do understand the frustration of paying the credit cards down, believe me!
(thankfully, husband got a job offer yesterday so now it looks like everyone will be getting paid after all )
Anyway, I am very cautious when it comes to things like this, admittedly. I have to be, my husband is quite the free spirit when it comes to things like bills and credit scores. So I am probably the only person who would question doing this, so no one should pay attention to my ramblings anyway.
We worried about moving from un-secured debt to secured debt, too, but we decided to go ahead with it because Calgary has such a strong real estate market - if we got into a situation where we had to sell our house to keep up financially, we would make probably about $150,000 more than what our new mortgage is. If your real estate market isn’t that firm, I don’t know if I would advise this move for you. There are definitely pluses, but you’re right not to risk your house.
You’re also right to keep a sharp eye on your finances and debts, etc. I hope it doesn’t come to that, now that your husband has an offer, but missing payments on high-interest credit cards is really a bad option. Have you considered getting a low-interest line of credit, and moving your credit card debt to that (and chopping up the credit cards!)?
I note that the OP is canadian, but in the US, interest on debt secured by your primary residence is also tax deductable, which lowers the effective interest rate by about 1/3 depending on your margional tax rate. You also have a loan that is amortized to actually pay of the interest instead of jiggered to keep you in debt forever.
I know it’s bad, and I have never missed a payment before so it would truly be a last resort. Now he has a firm start date though, so hopefully things are about to turn around.
We only have the one credit card, and the interest rate is well below average. Otherwise I would consider consolidating.
You have a lot more equity in your house. We have only lived here a few years and the market hasn’t changed much, so to put all our debt in the house we would pretty much owe what it is worth. So it sounds like it is a better deal for you than us. If we had that much equity I would probably feel safer doing it.
The interesting thing (and by interesting, I mean cold-hearted, money-grubbing bastarding) about credit cards is that you’ll never get to zero making minimum payments. I did a rough spreadsheet once to calculate this out, and it never hit zero, and I projected a loooooong way into the future. You suppose the credit card companies know this?