- The Washington Times - Friday, September 18, 2009

Q. My wife and I have just realized that we owe $8,000 on our credit cards. We own a home with a $200,000 mortgage. Our rate is adjustable, but it has remained at 3.75 percent for more than two years.

I honestly don’t know how we ended up with so much credit-card debt. I am wondering if we should refinance our home and take out cash to pay off our credit cards. However, we’re not sure about the value of our home because a foreclosed home across the street from us is on the market for $199,000, and it’s a bigger house.

Is there a refinance program out there that could help us? Our credit rating is excellent, and our combined income is about $80,000 annually.

A. Indeed, you will have trouble refinancing to a desirable interest rate if you have little or no equity in your home. I’m not sure refinancing would be in your best interest anyway. Don’t shoot the messenger, but your brief e-mail suggests to me that you and your wife are overspending somewhere.

While $8,000 in credit-card debt is never desirable, it’s certainly not outrageous. Your mortgage interest rate, at 3.75 percent, is well below the levels of today’s fixed rates. Your income, in relation to your mortgage balance and consumer debts, falls well within what’s considered an acceptable level.

Let’s run your debt-to-income ratio (DTI), which is a calculation lenders use as a tool to determine the affordability of a mortgage loan. It is simply the sum of the total monthly mortgage payment and the minimum payments on other debts.

At 3.75 percent, your principal-and-interest payment should be somewhere in the range of $950 per month if your loan is amortized over 30 years. Your taxes and insurance might total another $200 per month, making your principal, interest, taxes and insurance (PITI) payment $1,150.

Credit-card companies usually charge about 3.5 percent of the balance per month. This would mean your minimum monthly payment on the $8,000 credit-card debt should be near $280.

If we add your $1,150 and your $280 credit-card payment, we have a total debt payment of $1,430 per month. Conventional underwriting guidelines suggest that this number should not exceed about 38 percent of your gross monthly income. Your annual income of $80,000 equals $6,667 per month. If we divide $1,430 into $6,667, we find that your debt-to-income ratio is just 21.45 percent.

Lenders would consider your income quite sufficient to comfortably pay your mortgage and credit-card payments. Even if your adjustable-rate mortgage spiked to 8 percent, your PITI would jump to $1,660, making your total debt-to-income ratio just 29 percent.

Where is the money going? Here are a few questions you should ask yourself:

Do you have any other debts that you didn’t mention? I have seen folks with your income who spend $1,600 per month servicing the loans on their BMWs.

Do you have any obligations or extraordinary expenses, such as school tuition or elderly care? These often necessary expenses are not considered in a lender’s qualifying ratios.

How would you describe your lifestyle? Do you spend an excessive amount on dining out or fees to a country club?

I might suggest that you sit down with your wife and examine, in detail, where your money goes every month. Decide what can be trimmed and make every effort to have the discipline to stick to a manageable budget.

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

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