Loans Answers

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: Yes, you should go the home equity route … especially if you can join a credit union.

Right now you’re being circled by sharks that are going to do great financial damage to your future.

Fight back.

Here’s a little primer, for anyone out there who is overwhelmed with credit card paybacks:

Make a short list of places where you can get a fair home equity loan. Look locally, and avoid shark banks that send you checks in the mail that fail to have contract information on them.

Call the mortgage departments on your short list, write down the information such as current rates, terms, options, etc. Now you’ll know your options. Fixed rate is good, it’ll help you plan.

Remember to ask what your monthly payback will be, so you will not be strapped each month. You may need to stretch out the equity loan a long time to crawl out of your hole, initially.

You will need to give your loan officer lots of financial and equity information. Do a good job preparing your documents, and do it quickly — get away from the shark banks as fast as you can.

After your mortgage bank works out your new deal, put the “big check” in your checking account. You COULD allow them to pay off the cards for you– BUT why not start taking full control of the situation now. The goal will be to start closing the credit card accounts, starting with the ones with the highest rates.

On the other hand, banks may do your work for you for free, and if you’re not comfortable putting your own financial house in order — why not let them for free?

There are two ways to close an account. Make a form letter and fill out the address, account number, and closing balance, and mail it. This way you create evidence of the correct closing time, in case those pesky banks try to keep your account open against your will. Cut the card in half and mail it in with the closing letter — let the sharks eat plastic instead of your wealth.

The second way, is to close an account by phone, transferring the money from your bank account — they may charge you a fee to do this — some of them are real rats, those sharks.

They are trained to try to keep your business at this point. When they ask you why you are closing the account, and whine about losing your business, have a firm answer ready — show them NO sympathy. “We don’t require your services.” is all you need to say.

BEFORE YOU BEGIN THE CLOSING PHASE, make yourself a chart.

You can do it on an ordinary writing tablet, or if you have Excel on your computer it’s even better, because it will sort your list for you. You will want to sort your account information by interest rate — the highest rate accounts are the ones you gun for first.

If you close these accounts by phone, they will usually immediately offer you a substantially lower rate at the time of closing, and if the term is long enough, and the rate is low enough, you might want to keep one if it’s a large percentage of your debt. BUT send the same amount of money to the credit union as your first payment.

The purpose of your chart is to keep very close track of all these decision you make, and your plan for eliminating debt entirely.

DON’T re-negotiate rates with ALL those cards — stick with the credit union — otherwise you’ll be chained to your rate sheet list, trying to stay on top of the interest-rate juggling act, and is it worth your time?

Also, once you’ve got that nice, long-term, fixed rate loan. It will be easier to work out a payback plan, without all the mesmerizing information from credit card companies.

Don’t forget to write off that interest on your new equity loan, on your taxes next year. It’ll likely be thousands.

And REMEMBER when your tempted to use a credit card again, you may be DOUBLING or even TRIPLING the cost of an item, when the balance racks up. Is that dinner out really work triple the cost?

If you’re uncomfortable having this attachment on your mortgage, keep in mind that lots of wealthy people are using their equity for new investments and to increase their wealth. And that’s exactly what you’ll be doing too, in the long run.

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Filed under: Home Equity Loan