Q: Freedom 125 2nd mortgage loan from ditech.com
Question: I’m thinking of getting a second mortgage loan from ditech.com called >Freedom 125 (borrow up to 125% the value of your home less the current >balance on your first mortgage) to consolidate my credit card debts. I >looked into it because of its possible tax advantages even though my credit >cards already carry very low rates: 9.9% to 10.5%. ditech’s rate is very >high, 15.25%, but there is ZERO closing cost. It can be bought down to >14.75% for $395.
>The loan agent was trying to convince me that their 15.25% is still a better >deal than my 10% credit card rates because of 1) interest on 2nd mortgage is >tax deductible and 2) their interest is simple while credit cards’ interests >are compounded, so on a 10% APR credit card, I would be paying close to or >even more than 15% per year.
>I also found a lower interest rate from another company, 12%, but the >closing costs total $2500.
>I’d appreciate your thoughts.
Answer: They are lying to you. With friends like them, you have little need of enemies.
Interest on a loan in excess of the value of your home is not tax-deductible. Say you still owe 75% on your property, and you mortgage it up to 115%. Only 60% of your interest is deductible (the fraction that takes you from 75% to 100%); 40% of it (the fraction from 100% to 115%) is not.
There’s another limit of $100,000 on home equity debt (drops to $50,000 if you’re married filing separately, I think); interest on money in excess of $100,000 that you borrow for any purpose other than to buy or improve your home is not deductible.
Next, credit card interest only compounds if you don’t pay at least the interest every month. If you are so far over your head that you can’t keep the interest paid up, a home equity loan at even higher rates is going to make matters worse, not better.
Finally, if you default on a credit card debt, you have problems, but you still have a roof over your head. If you default on your home equity loan, you can lose your home to foreclosure.
These people are trying to rip you off. You are better off with the credit card debt, as long as the rates you cited will remain at their current favorable levels.
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