My Debt Blog

I was listening to a show on the radio today, a caller with about 30 grand in credit card debt rolled that debt into his mortgage through an equity line. Sure this is just shifting that debt into another form, but maybe there is a benifit to doing this. This guy did not have the best credit before, because he carried a lot of credit card debt, but he had equity value in his house. By refinancing his house, he was able to pull that credit card debt into the equity line, which paid off his credit card companies, and his credit improved. He pays more on that equity line now because he no longer has to pay those credit card companies. In turn, come tax time he can take any interest he has paid and use that as a deduction on his income taxes. You cannot deduct the interest you paid on a credit card because they’re unsecured. The catch is you have to have a reasonable amount of equity in your home first in order to use it to pay your debt. I recently got my house and my loan to value is probably too high to consider this yet.

The show also said to avoid credit card consolidation companies like the plague. I guess when you consolidate all your credit card debt and make settlement payments to your creditors, it is as bad as bankrupsy because those creditors are not being paid on a regular basis while you build your big payoff payment for them. Granted it is best to not get into that bind where you have to resort to thinking about doing settlements or consider bankrupsy.

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For me the house buying process was like having dental surgery. Buying a townhome was a big step forward in my life and I knew going into it my financial history was going to be looked at with a fine tooth comb. The first time home buying experience was long and hard, waiting for people to call me back, getting on top of people to call me, calling people to call me back, but finally I got that much needed approval. Now the process is going to get more difficult.

With the foreclosure rate increasing, we’re starting to see a trend regarding sub prime lending. For a family that makes 100k a year they can afford a 300k house as long as their debt is relatively low and their credit is solid, and they have money left over to save, invest, or for emergencies. The same family would really be stressing themselves on that 100k a year trying to afford a 500-600k house which eats up any extra income they had, no savings, no fallback plan.

Types of mortgage flavors you can get out there:

• Fixed rate mortgage is probably the best because it locks a (hopefully) low interest rate in for a term of 30 years, 15 if you feel you can handle that extra payment given you can handle those emergencies that come up.
• Adjustable Rate Mortgage (ARM) 3, 5, 7 year terms typically lock an interest rate for a period of time and then become a variable rate after the term expires.
• Interest only financing does not include any principle payment unless you include it in your payment, these are common for equity lines of credit or secondary financing.

Going back to the example of the family trying to afford a 500-600k home on 100k are probably doing it on an interest only mortgage at about 95 to 100% loan to value, which means they basically don’t own any of their house. I would love to have a huge house but I’m not going to get myself into a serious financial bind trying to afford it.

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