And… rolling in the credit card debt. I know it’s usually the last thing that anyone ever advises, but having given it a lot of thought over the past year I believe we can make it work for us as an effective debt reduction strategy.
I’m a little blown away by what our credit union can swing. We currently owe $48K on our mortgage, with twenty three years left on the note. Our current finance rate is at 7.375%. Our current payment is $514 (this includes insurance and taxes which goes into our escrow account).
If we roll in $25K credit card debt, we would be shooting for a $77K mortgage with 5.125% interest, for a 20 year mortgage. The current payment would become $621 (including insurance and taxes). And we’d be able to pay off the mortgage faster (twenty years vs. the twenty three remaining).
There are a lot of factors coming into play for this to work. First of all, our options are limited, since we live in a manufactured home. Not a lot of lending companies want to carry manufactured homes, and I find that most really prefer the mortgage to be significantly higher than $77K (they don’t make a lot of money on such a small mortgage).
The credit union can only loan us 65% of the value of the property, so if the property is worth $120,000 they can give us a $77,000 loan. First of all, our home and property must be assessed at $120,000 or more in order to get the $25K cash back to pay off the credit card debt.
The closing costs will be $2341, if my credit score is over 740.
Check out my scores back in 2007. I’m weeping.
Here are the key factors affecting my score:
- The amount owed on your revolving/charge accounts is too high.
- The proportion of balances to credit limits (high credit) on your revolving/charge accounts is too high.
- The time since your most recent account opening is very recent.
- You have recently been seeking credit or other services, as reflected by the number of inquiries posted on your credit file in the last twelve months.
Number 3 links to back in September 17th of last year when I was applying for several new credit cards, in order to move our debt to 0% cards. I do not recall applying for anything else in the past year, so my hope is that my credit score will rise a few points once the twelve months has passed.
Just for fun, I checked with CreditKarma and they estimated my score as 732.
Since Mr. A is still building his credit, they won’t be using his credit to secure the mortgage (although of course his name will be on the mortgage).
If at the time we apply for the mortgage my credit score is still under 740, the closing costs will rise from the aforementioned $2341 to approximately $3141 (but only $495 will need to be paid out of pocket). The rest can be rolled into the loan. No PMI will be required.
According to Zillow.com our home and property is worth $134,000. We will have to have a full appraisal, which will cost around $400.
The credit union says we should first ask a realtor in the area if they could give us an idea of what our property will be worth, before we pre-qualify for the loan.
I downloaded this very fantastic FREE for personal use Loan Amortization Schedule spreadsheet from Vertex42 and checked out some of the numbers. Currently we are paying about $800 a month toward our credit card debt ($425 is the minimum, so we are paying about double). The new mortgage would be about $100 more, so if we applied that extra $700 each month we could have our entire mortgage paid off in 6 1/2 years!
I’m also hoping that we’ll have the option of itemizing our deductions on income taxes since we’ll be able to claim the interest. Two of the credit cards are at 0% interest, with the 0% interest period ending soon. Two cards are already accruing interest, so I need to get them moved to 0% offers. Refinancing and rolling in the debt will help to ease up our cash flow, and we can still pay the excess toward the mortgage. Mr. A’s businesses are bringing in money, but some months are lean, so wiping out the credit card payments would really help in those months.
I am a little scared because I have heard too many horror stories about people consolidating their debt, then running up the credit card debt again.
I’ll let you know what we end up doing.