- The Washington Times - Friday, April 10, 2009

Q. I recently responded to a letter I received from a mortgage company in North Carolina. The letter said that I could refinance my house to a Federal Housing Administration (FHA) loan and obtain cash out in order to pay off credit card debt. My credit score is about 610, which isn’t great.

However, I have a lot of equity in my home. The balance of my existing mortgage is $145,000 and the property is worth at least $250,000. I have a 30-year fixed-rate of 6.25 percent. I also have about $15,000 in credit card debt.

The loan officer e-mailed me a good faith estimate. I noticed that the rate on the form was 6.50 percent. The new loan amount needed to be $169,000 so I could receive $15,000 to pay off my credit cards. The balance of the amount will be used to cover the closing costs. I really want to pay off my credit cards, but it seems that my new mortgage balance will be pretty high. My final loan amount is $171,958 because of the mortgage insurance premium (MIP).

The loan officer pointed out that the interest rate is a lot lower than the rate on my credit cards and interest paid is tax deductible.

Is this something that you would recommend?

A. No. Avoid that deal like the plague. Shame on the loan officer for suggesting it. If we dissect this deal, you will realize that it makes no sense.

First, you would be taking $145,000 of your mortgage debt and raising the rate from 6.25 percent to 6.50 percent.

Second, your would be paying $9,000 in nonrefundable fees, points and closing costs to receive $15,000 in cash to pay off your credit cards.

Third, loans guaranteed by FHA require that borrowers pay an upfront mortgage insurance premium that is added to the loan amount.

So, your mortgage debt goes from $145,000 to almost $172,000 and your credit card debt drops from $15,000 to zero. This is not a good deal. It's costing you $12,000 to borrow an extra $15,000.

Here is my suggestion:

Ask some trusted neighbors, friends and family members if they have recently refinanced to take advantage of today's low rates. Ask them if they had a good experience. Call the loan officers who come highly recommended and go with the one you like the most.

My guess is that even with a low credit score of 610, you should be able to refinance, either through an FHA or conventional loan, and take cash out to pay off your credit cards at a lower rate with far fewer sunken fees.

Henry Savage is president of PMC Mortgage in Alexandria. Reach him by e-mail at [email protected]

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