Rolling card debt into home refinance

When does it make sense to pay off card debt with refinance money?

By Sally Herigstad

To Her Credit

Sally Herigstad is a certified public accountant and the author of "Help! I Can't Pay My Bills: Surviving a Financial Crisis" (St. Martin's Press, 2006). She writes "To Her Credit," a weekly reader Q&A column about issues involving women, credit and debt, for CreditCards.com, and also writes regularly for MSN Money, Interest.com and Bankrate.com, and has guested on Martha Steward Radio and other programs. See her website SallyHerigstad.com for more personal finance tips and free budgeting worksheets. Ask Sally a question, or read her previous answers in the To Her Credit archive

Dear To Her Credit,
My husband and I have a huge credit card debt of $65,000. We also need to refinance our mortgage loans. Our first mortgage balance is $118,000 at 5.78 percent. Our payment is about $1,600 a month. We also have a second mortgage with a balance of $18,000 at 7.25 percent. The payment on that is $235 a month. Our total mortgage is $1,835 month. Should we refinance our mortgage and add in our credit debt, so we're only making one payment each month? Or is there a better way? -- Laurie

Dear Laurie,
If you bundled all your mortgage and credit card debt together and got a $201,000 30-year loan at this week's average rate of 3.66 percent, your payment would be $921 -- not including insurance and property taxes. That's about half the amount you are paying on two mortgages right now, and it includes your current credit card debt.

Besides lowering your monthly payments, such a move would save you a bundle in interest. Right now, you are probably paying more interest on your credit cards than you are on your house! Before you run out and refinance, however, there are a few things you need to consider.

First, do you qualify to refinance your home at a competitive rate? Home values have dropped, as you know, and lenders are requiring borrowers to have more equity in their homes after refinancing. If you haven't refinanced in a few years, you'll be surprised how much the process has changed. You need to show a  very good credit score, solid equity, a demonstrably good source of income, and more to get the best rates today.

Another thing you should consider is that refinancing to pay off credit card debt turns a short-term debt into a long-term one. Do you really want to spend the next 30 years paying off living expenses from previous years? One way to avoid dragging it out so long is to take out a 15-year mortgage, instead. Bonus: Your interest rate on a 15-year loan will be even lower. Your payment on a $201,000 mortgage at today's average rate of 2.94 percent would be only $1,382 (again, not including insurance or taxes).

You and your husband also need to work out how you ended up with $65,000 in credit card debt. That's a serious debt load, especially in proportion to your home mortgage. If it was the result of a medical catastrophe or unemployment, and you now have things under control, you can start over and avoid running up the card balances again. Unless both of you can say no to spending more than you make, however, a few years from now you'll be right back where you started. In that case, no matter how good a deal you get now, by enabling you to go on overspending, refinancing will leave you in worse shape than you were in before.

See related: Don't let delinquent debt keep you from getting a mortgage, Be wary of closing credit cards when applying for a mortgage

Gary Foreman, "New Frugal You"

Sally Herigstad, "To Her Credit"

Cathleen McCarthy, "Cashing In"

Jane McNamara, "Let's Talk Credit"

Elaine Pofeldt, "Your Business Credit"

Erica Sandberg, "Opening Credits"

Published: February 1, 2013

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