- The Washington Times - Wednesday, January 24, 2007

Q:I have a $275,000 mortgage with a fixed rate of 6 percent. I also have about

$35,000 in credit card debt that I used to purchase a time share. Our home is worth at least $400,000. Although I won’t be paying any interest on the credit card debt for another two months, I’m wondering if I should refinance and roll the credit card debt into the loan. Is it wise to eat up home equity to pay off credit cards? Thanks in advance for your comments.

A: As with almost anything in this world, there are good ways and not so good ways to do things. Let’s use your dilemma to illustrate what I mean.

I believe that no matter how much juggling one may do to remain in the oft-seen “introductory teaser” rates offered by many credit card companies, they usually stick you eventually with some pretty high rates. You are far more likely to find lower mortgage rates for your $35,000. Also, remember that mortgage interest is tax deductible in most cases, while credit card interest is not.

Having said that, it would appear that I am endorsing a refinance to eliminate the credit card debt. Well, I am. Sort of.

Financial responsibility must come into play. The biggest problem I see with folks transferring high credit card debt to their mortgage is the tendency to jack their credit cards back up after the refinance. The last thing you would want to do is give up $35,000 of equity in order to bring the consumer debt to zero, just to charge up the cards again.

Be disciplined. A $35,000 credit card balance may require a minimum payment of $1,000. A new mortgage with an extra $35,000 might increase the payment by only $200. This $800 in extra cash flow should help ensure that all credit cards are paid in full every month.

Another thing to remember is that if you refinance to a 30-year fixed rate, the $35,000 is amortized over 360 months. Without making extra principal payments, you will be paying a lot more interest over the life of the loan.

This issue comes up from time to time from folks who ask me if it makes sense to roll an auto loan into a mortgage. The overall monthly obligations will be considerably lower because most auto loans carry terms of five years or less. Spreading it out over 30 years means that the vehicle will be long gone well before the debt that financed it is retired.

The bottom line is this: If you convert $35,000 into long-term mortgage debt, the extra cash should be used in a positive way. Invest it, add it to a retirement fund or make extra payments to the principal balance of the mortgage. Any of these options is good. What you don’t want to do is squander it.

If you are, indeed, financially disciplined, the next issue to tackle in deciding whether to refinance is to look at the current interest rates and compare them with your existing rate. A 30-year fixed-rate loan is hovering around 6 percent with no points. Typical closing costs might fall in the range of $3,000.

Taking this deal would keep your rate the same and convert what eventually will be high-interest credit card debt to 6 percent tax-deductible money. This sounds good, but paying $3,000 in closing costs makes the deal questionable.

Another option might be to take out a fixed-rate second trust. You might find a rate in the mid-7s with little or no closing costs. This is probably a better option. If interest rates fall just a little bit in the coming months, you can consolidate the first and second trust at 6 percent or lower with little or no closing costs. If rates don’t fall, the $35,000 is locked at a tax-deductible rate that is sure to be lower than the typical rates charged by credit card companies.

A good loan officer should be able to get some more details and outline a recommended plan.

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

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