Dissolving debt dissipates marital discord
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Dear To Her Credit,
My husband and I are $42,000 in credit card debt, have a $29,000 car note and a $20,000 equity loan. Though our mortgage payment is relatively low ($1,500 a month), we are sinking in debt and can barely keep up.
I want to sell my house (we wanted to buy a bigger home as we've outgrown ours within a few years anyway) and pay off all of our debt with the money we get out of the house -- hopefully about $70,000. I don't mind selling the house because I don't like the neighborhood anyway, and I'd like to get the kids out of here.
I should let you know we have VERY decent incomes ... we just owe too much. I wanted to sell the house, pay off all of our debt and rent for about a year. My rent will be about $1,700 a month -- a little more than our current house payment, but we'll save all that interest on the other debt.
My current mortgage is at 6.5 percent, and my equity loan is at 11 percent. My credit score is in the low 600s because of our high debt.
If my calculations are correct, I will direct deposit my whole pay and live off of my husband's income. I figure in 12 months, I will have at least $36,000 and will be able to look for a house in a neighborhood that we prefer. My husband disagrees. He thinks we should refinance, but I think that is just moving money around and also making it impossible to move for many more years. I feel like I just want to start over. Is there a professional I can talk to about this? -- Heidi
The most important factor in your decision is that you really don't want to live in your current neighborhood. We can make all kinds of calculations and draw up a list with keep-the-house pros on one side of the page, and sell-the-house cons on the other, but if you don't want to raise your kids on this block, that outweighs all the other pros and cons.
I normally do not advise people to sell their homes to pay off debt. Selling a home is incredibly expensive. You can easily spend 10 percent of the sales price on commissions, closings costs, fixing up expenses and then you may get less from your home than you expected. Then you turn around and pay closing costs on your next home. It's hard to make up for all those expenses.
Plus, you're selling during one of the worst housing depressions most of us can remember. That's fine if you turn around and buy again. But if you sell now and wait a year or two to buy again, what happens if the housing market picks up and prices start going up again? You could get left behind.
If you were staying in your home, your husband's idea of refinancing would be sensible. If you had a higher credit score -- say over 700 -- you could refinance and save up to $500 per month at current low rates. With a credit score of 600, you won't do quite so well. You could probably refinance in the low 5 percent range with your credit score. You'd still save about $250 per month, but you would have to stay in your home about 13 months to break even after refinancing costs. That straps you into staying longer in a house you don't even like. Let's look for other options.
Here's one idea: Sell the car. You have a $29,000 car note. If you're paying 10 percent interest, your payment is about $600 per month. It's killing you. An expensive car also means higher insurance costs. You might be surprised to find out how much you can save every month by replacing your car with something much older. Ask your mechanic what kind of older car he recommends -- mechanics have seen it all! Take that $600 you save every month and start applying it to your credit card account with the highest interest rate.
With no car note, your debt ratio and your credit score should improve dramatically. If the debt ratio is the only thing holding your score down, you should soon qualify for a much lower mortgage rate on the house you want to buy.
Next, rustle up some cash by selling things. You must have bought something to get $42,000 in credit card debt. If you're like most of us recreational shoppers, a few things still have tags attached. See if you can return them. Look for other things you can sell. You're thinking about moving, so it's a great time to get rid of things. Apply all the proceeds from the sales to your credit card debt.
If you and your family find other ways to cut expenses and make more money, you can start knocking off that credit card debt faster than you think. Talking to a professional is a great idea; I recommend a nonprofit agency affiliated with the National Foundation for Credit Counseling or the Association of Independent Consumer Credit Counseling Agencies. Or, check out a financial course in your area, such as a Dave Ramsey seminar. If Dave can't get a person motivated to become what he calls a "gazelle" and get out of debt, no one can!
Once you get your credit score up into a better range, if you really want to move, go ahead and do it while the interest rates and home prices are low. You'll save money if you sell your house and buy another one right away, instead of moving into a rental first and paying moving and sundry expenses twice.
With your good incomes, there's nothing stopping you and your husband from becoming debt free, moving up to a house you both like, and reaching any other goals you choose. You can do it. Good luck!
Take care of your credit!
See related: Michigan couple honored for paying off $92,000 in credit card debt, The biggest losers (of debt): How a family shed $106,000 in debt, Before you refinance, clean up your credit score, Over your head in debt? 5 extreme budgeting ideas
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