Debt Refinancing
Question: >When I was in college, I made the common mistake of getting in over my head >with credit card debt and getting my credit downgraded. I believe I have >just fair credit right now.
>However, I have been out of college for awhile and have gotten things all >straightened (I hope!). I no longer use credit cards and pay for everything >in cash. I have a rental home with about 25K in equity, earn about 50K in >salary, and have about 2K in savings. I currently pay $800/month toward my >25K in credit card debt which has a 19% interest rate. The house takes care >of itself and I have no other debt besides the two credit cards, so I >anticipate being totally debt free in five years at my current rate.
>My question is, given only my fair credit rating I have been unable to get >25K more in credit cards to refinance the rate and am not sure if I should >explore a home equity loan on my rental home. I am fine with my 5 year plan >but just wanted to write to see if you all knew of any other avenues I could >take that would be more efficient.
Answer: A few of points.
A couple of grand in savings isn’t much – it could be wiped out tomorow if there was, for instance, a problem with the sewer main to that rental house you own.
In my experience, a “home equity loan” is a loan against your principal residence. That’s not to say that you couldn’t get a loan by using the rental house as collateral, but it’s not a home equity loan and I’d think the terms will not be as generous – there will be closing costs and fees that you wouldn’t encounter with a second mortgage against a house you actually lived in. I believe you would not get the tax benefits you’d have if you were borrowing against your principal residence.
But that’s just a guess, the only way to find out what such a loan would actually cost is to go to several banks and ask.
I make out, based on what you said above, that you’ll have the cards paid off in four years and seven months. If you could squeeze another couple of hundred a month out of your budget, you could drop that to 33 months. Increased payment or not, you wouldn’t have to pay whatever closing costs might be associated with another loan.
The typical equity loan has a term that runs for several years – do you want to trade a 4 – 5 year term for a 7 – 15 year one?
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Filed under: Home Equity Loan
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