Advice Please: Debt Consolidation Using Equity - YES/NO?

21 Replies

Thank you in advance for your help! I'm trying to figure out, big picture, if this is worth it and I would DEEPLY appreciate the advice of people who have been working with real estate (investors, financial planners/investors, people who just know a lot more than me) sharing your invaluable advice. ;-)

Quick facts:

Current mortgage of $204k

Current Appraisal in Austin market is around 330-350k (could be more, but that's being conservative). The Austin market is still going strong and we live in a very desirable area.

We *could* roll up some debt and take our mortgage to 284k.

This would increase our mortgage payment by 566/month, but by reducing the monthly minimum payments with the debt disappearing we would gain an additional 1000-1100/month (after the 566 is deducted).

I'm also aware that mortgage interest is something we can deduct from our annual taxes vs. other debt which we can't...

This is not our forever home, but we've had so much equity in our home for so long that I can tell I'm fearful to cut into our equity, but I don't want baseless emotion to make this decision and keep us tied to something that we're not looking to stay in forever. I would like to know, FINANCIALLY, what is the best decision big picture.

We could also SELL our home if that was the best option, big picture. So not adding to our debt, but pocketing cash and paying off debt that way.

What would you do and why? I'm asking because we'd like to make the best financial decision to have more money for future investments in real estate, etc...

Again, THANK YOU very much for any and all advice. Your time is DEEPLY appreciated.

~

JD

Austin, Texas

You mentioned this is not your forever home. How long do you plan to stay in this home? The sooner you are planning to move, the less sense it makes to refinance and cut into the equity. If you are planning to stay 3-5 years, then it starts making a little more sense to refinance and save yourself the monthly payment. Planning to stay 5+ years and I think a refinance sound pretty reasonable. 

With traditional mortgage rates rising, I am usually of the opinion to get your debt in place before rates rise even more. However, putting too much debt into place when you are not planning to be around for the long term could handcuff you when you are ready to move.  

How much is your non-mortgage debt and what is it from?  Also, what are the terms of the debt (length of the loans, interest rate, etc). 

Hi Scott, thank you very much for you time. Some of the debt is from credit cards with higher interest rates 19.99% - 22% (emergency health situation where we needed to live in another city for a while to help with a family member and at THAT time we didn't have our remote company set-up yet - so we were unable to work during that extended time). Then, another part of the debt is a 5-year personal loan for 19.xx%. The amount financed for that loan is roughly $24k, but if we pay it off over the course of the loan it'll be a total of $37,600. Ideally, and our thinking is, that if we keep as much money in our pocket every month we will have more money to immediately target and get rid of any other existing debt (very low balances on two auto loans and student loans that we could wipe out quickly) while also putting more money towards savings and other investments. Our mortgage payment could get an increase of 566 (but perhaps even less of an increase) and with the minimum payments being wiped out every month (even after the increase in our mortgage payment) we would still have at least a 1000-1100 (and possibly more) left in our pocket every month. Hence why it's tempting. Some lenders are offering rates and fees as high as 8k (those seem more ridiculous - although still cheaper overall than what we'd pay to credit card companies OR the personal loan company). Other lenders are offering us total rates and fees closer to just 2300-2400, so those are the tempting ones. THANK YOU again for your time!!  ;-)

Wow, it sounds like you guys stumbled into quite a mess :-/  

Trying to lower your rates seems very attractive, but I have a hard time recommending rolling consumer debt into a 30 year loan... How is your credit? Have you looked at doing a HELOC? You may be able to get a better rate and consolidate some debts into this without stretching the loan term out as much. Do you have the income to support these kind of payments/debts? You could also look int programs like the good old fashioned Dave Ramsey Plan or talk with the folks at the CCCS (Consumer Credit Counseling Services) https://credit.org/cccs/. Or just keep posting on BP. ;-)

One thing to consider about taking a loan against your home to pay off credit cards is that credit cards are unsecured debt.  Your home is a secured debt. If you don't pay unsecured debt you can get sued and a judgement will be put against you. If you don't pay a secured debt they take possession of the pledged asset.

Scott: Thankfully, our credit is good and yes, we make more than enough to comfortably pay this debt and not be stressed about it (while also still living the lives we want to live and taking our son on fun family vacations, etc...which we know we could use to pay the debt down faster - but he's only this young once so our priority is precious time/family adventures). We're just looking big picture at how we can spend the least money overall, and the debt is the debt and eventually is going to have to come from somewhere, right? Even after rolling the debt into the home we'd, thankfully, have a decent amount of equity in our home with the Austin market still rising (for now), so we're thinking: roll it up in the home, dramatically reduce our out-of-pocket expenses every month giving us more cash in our pocket every month and no credit card debt. We could even target the mortgage more aggressively (if we wanted to), and then in a few years sell the home and still collect what's left of that equity with no debt at that time (except perhaps a new mortgage for a new home, but even that's unlikely because we'll be traveling too much as a family to justify it).  Funny you mention Dave Ramsey! I've taken his program and his plan has immeasurably helped us stay in the place of comfortably being able to handle all of this while continuing to knock it down more aggressively overtime. Thankfully, we're not stressed - we just want to have more money in our pocket short-term, because we're planning on selling this home anyway. ***If the refi costs were going to be ridiculous or if this was going to be our forever home I wouldn't be considering these things, but we've now found lenders with refi costs as low as $2-3K (so in 3 months we would've already made that back with the money we'll be saving from the min payments we'll be saving every month from not having anymore credit cards)...and I know big picture we're paying more interest on home loan, but again - if we're going to sell in a few years anyway (with still having equity to collect) then does that truly matter, because again - the debt has to come from somewhere at some point, so we may as well keep as much as possible in our pockets now, right? Am I missing something? Thank you so much! I really do appreciate your responses. ;-)

Don: Thank you very much for your response, too! If there was ANY question as to whether we would be able to pay this mortgage payment going forward, I would never be considering this option. Thankfully, we make (and have in savings) more than enough to pay it for a long while. We've been consistently paying down these cards (never a late payment) for a little while, and if we decide to refi-cash-out we'll be reducing our monthly out-of-pocket expenses by 1000-1100+ possibly even more (even after the increase in our mortgage payment), so I totally hear what you're saying, I'm just not concerned about not being able to pay the payment. By putting more money in our pocket every month, we'd have even more money to target back to the mortgage (if we wanted to). Please tell me if I'm missing something though? Oh, and if we were going to stay in this home for many many more years I'd also be more concerned about adding to the mortgage - but the debt has to paid from somewhere at some point, these refi fees are really low, and we can still sell the house in a few years with still getting decent equity back (presuming the world doesn't bottom out), soooo those are the reasons it's all tempting. This forum has been so helpful. Thank you so much! ;-)

FFYI: HELOCS are legal in the state of Texas now, and boy did I just date myself judging by how long they’ve actually been legal. Doh! I’m exploring them now. I obviously like seeing you *can* only pay interest for a while, but man that adjustable rate thing makes me extremely hesitant. I tend to feel calmer when things are FIXED, and I have only every done larger loans with FIXED rates. I’m still researching them though so if there are any other thoughts/not obvious benefits about them - I’m all ears, thank you very much for the suggestion. 

I'd consider taking out a HELOC on this primary. Consider your debt to come ratio. It should be under 45% for some lenders and 40% for others. The HELOC Reports like a big credit card, and is interest only and revolving debt.

Other thoughts...A homeowner won’t have capital gains if living in a house for 2 out of 5 years, prior to selling it. You won’t pay taxes now, if you’ve owned that long, but you can also rent it out for three more years.  So It’s possible to rent it out for 3 years, and get experience as landlords.  Prepare to sell in (nearly) 3 years for tax free growth. 

Lenders I use won’t count rents until they have been on tax returns for 2 years.  

Look for a rental house and another primary...any rental house I buy must have cashflow, and any primary house ought to work for adding value with light to heavy renovation while I live there. I prepare to stay for 2 years, while adding value, for tax free gains...and I like improving houses. 

This is how we began to add rental houses...look at my profile.

Kerry: Thank you so much for your response! 

HELOC: I like that HELOC is interest-only (more money in our pocket each month - for now), but I'm not excited about it being adjustable, and eventually we'd have to pay that debt, too...so is the only real benefit we'd have even more in our pocket every month from paying just interest? That also leaves me feeling nervous sometimes, because although I'd love having even more money in our pocket every month from only being required to pay interest-only...eventually you're going to have to pay that total debt, so I'd almost rather be attacking it all from day one.

Unfortunately, we’re never going to be interested in using this as a rental property. It has a big beautiful pool that we love, but we don’t want to take on the added liability of renting with a pool. We don’t want to worry about lawsuits and we don’t want to worry about the renters causing expensive damages to it. Even if we had them sign contracts about it, IF they damaged it in any way we’d be possibly be left in the position of suing them for getting it fixed (after we fixed it of course). Pools are expensive and we just don’t want to open the door for any of that headache. We’d rather just sell and find other properties to invest in that don’t have pools.

Oh...and we’ve been in this house since Aug 2005. ;-)

If I were in your shoes I would do the HELOC and pay it off as aggressively as possible. Living without consumer debt just feels better to me. Family vacations are great, but in my experience (kids age 7, 5, and 2), kids just need to be loved and you can do that pretty inexpensively until you get things in order financially.

Again, that's just how I would handle it if I were in your shoes. There's not a right or wrong way to do personal finance.  Best of luck with everything!

First ask yourself how you got the debt-part was a family emergency.  What is the cost of refinancing and are you willing to change your spending habits or will you see the zero balance on the credit cards and add more debt?  Could you transfer some of the credit card balance to a no-interest credit card?  I believe there are some that do 0% interest for a short period of time-move the money over and aim to pay it off within that 0% interest period.

I get that you have a young family and want to make memories, but memories don't have to cost money.  Go to a park, go fishing or to a lake for a day, take a picnic lunch, go for a hike.  When I think of some of my most cherished memories as a kid, they involved pizza picnics on the lawn (my mom makes amazing pizza), going berry picking in the bush with my parents or grandparents and time at the lake.

Thank you, Scott! I appreciate all of your advice. I’m researching HELOCs today. How do you get around the discomfort of the rate not being FIXED? That bothers me so much, because I really like to KNOW exactly what I’m committing to...

I agree that all children TRULY need is love, but both my mom and my husband's mom have already passed away (fairly young both from cancer), so we're both acutely aware that time is always precious and no one knows what the future brings, so we're all about love-filled, family adventures and giving our son real-world experiences while we're all young and healthy, and can truly experience everything this world/life have to offer (instead of assuming we'll have time later and then it doesn't happen). We don't live in fear every day, but our priorities are experiencing the world NOW. ;-) We also each have million dollar life insurance policies on us, so we know without a doubt if something happens to us we are not leaving any debt to our son/our families, so that's another reason we're all about seizing the moments and having fun family adventures together...now. Money is just money (we're not taking any with us and even after debts would be paid we'd still be leaving our son a good chunk), so those are other reasons we're comfortable living more in the now. ;-)

Theresa,

The cost of the refi is incredibly low, we have different savings accounts now that (thanks to Dave Ramsey) are standing by for family emergencies (so we will not be in that position again), and yes - our overall spending habits have changed dramatically. We’re going to keep some of the ccs open just to keep our credit rating at the high level it is now, but not use them (except the occasional putting a large purchase on one to get miles and then immediately paying it off).

If those are the family memories that meant the most to you - that’s awesome!!!  As a family, we enjoy doing those things and do them often, but we also really like spending a couple of weeks in the US Virgin Islands every year and snorkeling/scuba-diving.

;-)

@JD Peterson

Getting rid of high interest revolving debt should always be the main goal, except in one situation. That being, will you reacquire the debt again through poor financial practices? Then your #1 goal should be to change your way of thinking and spending habits, then eliminate high interest debt.

@JD Peterson

I’ll tell a personal story. The judge in my divorce chose to give me the joint debt. All of it. Plus child support and alimony. Well, they must have forgotten that I also have to pay taxes, rent, and buy groceries. I was pretty broke.

So I took out a loan from my 401k. Sounds like a terrible idea, doesn’t it? Not as bad as not being able to pay bills though. It took 2 years, but I was 100% debt free and loving life again. Would have taken much longer otherwise.

Think big picture. But also remember to stay debt free when you get there (not mortgage free).

@Anthony Wick : Thank you very much for sharing your story. I feel like you and I are very much on the same page as far as thinking big picture...doing something now that may not appear to be *ideal,* but big picture actually gets us to where we want to be faster...so extremely ideal (but as you said ONLY if we stay debt-free). ;-) Thank you again for sharing your story, and congrats for doing something that may not have been “the popular choice,” but without-a-doubt was the fastest and most effective. Rock on!