- The Washington Times - Wednesday, November 3, 2004

Q: My wife and I bought a home in Alexandria a year ago for $325,000. We took out a first trust for $260,000 and a second trust for $48,750.

Our down payment was for $16,250.

The rate on our first trust is 6.25 percent, fixed for 30 years. Our second-trust rate is fixed for 30 years at 6.875 percent.

Homes in our neighborhood are now selling for more than $390,000.

Because we now have more than 20 percent equity, we are considering the following: 1) Refinancing both loans to one loan at a lower rate and 2) taking out a new home-equity loan for $30,000 to pay off several credit cards.

My wife is against the idea of taking out an equity loan because she doesn’t want to throw away all of our equity. I disagree. Paying off our credit cards will save us more than $800 per month. Any advice is appreciated.

A: Refinancing your existing loans to one loan makes plenty of sense. If you plan on being in the property for a long time, go ahead and take out a new 30-year fixed rate.

The most important thing is to make sure you pay little or no closing costs. This will result in a higher rate, but you don’t want to spend thousands of dollars in your newfound equity to buy down your mortgage rate by a quarter or half a percentage point. That money is spent more wisely if it’s used to curtail your credit card debt. Recently, a zero-cost 30-year fixed refi has carried a rate of about 5.875 percent.

Which brings me to your second objective. I agree with you. Let’s dissect your debt situation and analyze it objectively:

• $260,000 mortgage at 6.25 percent

• $48,750 mortgage at 6.875 percent

• $30,000 in consumer credit card debt — probably at 10 percent or higher.

Consolidating your mortgages to 5.875 percent with little or no fees is a no-brainer. It’s cheaper money.

Now that you have 20 percent equity in your home, you are indeed eligible for a $30,000 home-equity line of credit (HELOC). These loans are typically tied to the prime rate, which is currently sitting at 4.75 percent. It doesn’t take a whole lot of math to realize that converting $30,000 of high-rate consumer debt that’s not tax deductible into a low-rate, tax-deductible HELOC is a smart move.

Your wife’s concern that such a move will “throw away” your equity is unfounded. True, a HELOC is secured to your home and you will have less equity because your total mortgage balance increases. But you will then have $30,000 less consumer debt.

Your total household debt isn’t increasing; it’s being rearranged to make it less expensive.

However, your wife’s concerns will be 100 percent valid if your take out an equity loan, pay off your credit cards and then spend and jack up your cards again. Transferring credit card debt into mortgage debt makes sense only if your objective is to lower your interest rate, improve cash flow and incur no more debt.

Never make such a move in order to free up your credit cards so you can borrow more.

Henry Savage is president of PMC Mortgage in Alexandria. Contact him by e-mail (henrysavage@pmcmortgage.com).

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