- The Washington Times - Thursday, January 27, 2011

Q. We have at least $200,000 in equity in our home. We also have a 15-year mortgage at 4.875 percent in the amount of $280,000 that we took out two years ago. Unfortunately, we also have about $25,000 in credit-card debt that we’d like to eliminate. Our retirement accounts are hefty, but we’re still three years away from retirement.

Our question is simple: Should we refinance and take out cash to pay off the credit-card debt? After a zero percent introductory rate, the rates on the cards are very high.

A. Converting high-interest credit-card debt into low-interest mortgage debt can be a good thing as long as you don’t jack up your card balances again after you have refinanced. I don’t know your situation well enough to make any firm recommendation, but I would suggest you ask yourself a few questions.

How did you end up with $25,000 in credit-card debt? If it was a result of your monthly household expenses simply exceeding your monthly income, you may want to consider refinancing to a 30-year loan, which would dramatically lower your mortgage payment. This would free up a lot of cash and, let’s hope, enable you to pay off your credit cards in full each month.

Was the debt incurred as a result of a one-time event, such as a medical emergency? If so, refinancing may or may not be in order, depending upon your income and the available interest rates. As of this writing, a 15-year fixed rate is near 4.50 percent with little or no fees. If you can lower your rate without incurring costs on your existing mortgage and convert $25,000 in high-interest consumer debt into low-interest tax-deductible mortgage debt, you’d be killing two birds with one stone.

On the other hand, if rates rise and you are unable to lock in a rate that’s equal to or lower than 4.875 percent with little or no fees, refinancing probably will not be a good option.

Income also should be considered. If mortgage rates are higher than 4.875 percent and refinancing is not a financially viable option, you should look into the practicality of an accelerated payment plan to get rid of the credit-card debt as soon as possible. If your income doesn’t allow such a plan, you may want to go back to the plan of refinancing to a 30-year fixed rate to free up cash flow, even if it may result in a slightly higher interest rate than 4.875 percent.

Compare your situation with these scenarios, and you should be able to make the right decision.

Send e-mail to henrysavage@pmcmortgage.com.

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