Pay Off Your Bills and Credit Cards and SAVE Money
Recently a member asked me about the 15-year mortgage option and if she could afford to pay off her house in 15 years. She was currently ten years into a 30-year mortgage, paying $1,000 per month for her payment. We examined her overall financial situation and discovered: she had $23,000 in credit card debt at 10% interest, a $10,000 student loan at around 6% interest, and, she was paying almost 4% on her current mortgage. The member’s goal was to eliminate debt, be mortgage free by the time she retires in 18 years and simplify her monthly payments.
With a debt restructuring plan, we wrapped her higher rate credit card and student loan debts into one 15-year mortgage loan. The monthly payment was about equal to what she was paying for her 30-year mortgage, including the minimum payments on both the credit card and student loan.
What is debt restructuring?
Simply put, it’s a realignment of your debts, usually consolidating them into one loan and one payment, so the debt is easier to manage. It’s a tool used by many who’ve seen debt build over time or escalate quickly or experienced a life change.
When should you consider a debt restructure or consolidation?
The reasons can vary from situation to situation, but you may consider restructuring your debt if you find yourself with high credit card debt or higher interest loans, or if you’re paying the minimum balance on multiple loans.
However, troubled finances are not the only reason for restructuring debt; many simply find it a better way to pay back the debt they owe. For example, some types of debt, such as credit cards, carry a higher interest rate that accumulates differently (and more rapidly) than interest on a mortgage. Taking a deeper dive into your personal situation may reveal opportunities for better money management. It can also ensure you maximize each dollar to repay debt.
Equity can serve as a financial tool.
The equity in your home is an often misunderstood and under-utilized asset. One can own a home free and clear, but be drowning in high rate monthly credit card debt or unreasonable loan payments. By properly aligning or restructuring your debt, you can often reduce monthly payments and ease cash flow. While debt restructuring may not be right for everyone, it is never a bad idea to discuss your situation with a trained professional. A new strategy can make the path to financial freedom much smoother.
A couple had been paying on their 30-year mortgage for about seven years and accumulated a good amount of equity but were misusing credit cards in a big way. They approached ECCU about a Home Equity Line-of-Credit to help them get credit card debt under control. The interest rate on their 30-year mortgage was a bit lower than our current mortgage rates, but the interest rates on their credit card were much higher, ranging from 9.99% – 19.99%.
We decided that a debt restructure plan may be of value. We consolidated all debt into a mortgage refinance using a specialty portfolio product that covered 100% of the value of the home. Based on the automated valuation model and assessed property value, we had enough equity to move forward. The plan saved the member money monthly, shaved eight years off their mortgage, and put them on a plan to financial freedom. The couple went from barely getting by (making roughly 12 individual monthly payments) to one mortgage payment. It reduced their payments and will save significant interest over the life of their loan.
The pros and cons of using your primary mortgage for debt restructuring
- One major pro is the savings in interest over the life of the loan, accented by the amount of time one might carry the debt. (The longer the debt, the more interest you pay.) Typically, if you roll unsecured or high-interest secured debt into your mortgage and make the same monthly payment, you will pay off the debt more quickly. (Compared to just making the minimum payments on credit cards or revolving loans.)
- Another plus to restructuring debt within a primary mortgage is the ability to simplify bills. Multiple bills with multiple due dates all racked with high monthly minimum payments can get confusing. By wrapping all of your debt into one low-rate monthly payment, you can make life easier.
- Potential tax incentives are another reason to consider refinancing higher interest debt into a mortgage. The interest you pay on your home may be deductible, whereas interest paid on other unsecured debt is not.
- The con is important and one I hammer home: You are placing a lien on your property for collateral. Thus, there is more to risk if you cannot make the payments. If you default on a credit card, for instance, you may go to court and have a judgment placed if you cannot make arrangements. But, if you default on your mortgage, you could lose your home.
- Closing costs may be another con of refinancing your mortgage to pay off higher interest debt – evaluate your costs versus savings based on your needs and financial situation.
Contact us for a free analysis.
If you are a homeowner and have high-interest credit card or other debt, and you want to know more about debt realignment, call me for a free analysis at 269.544.3155 or email me at firstname.lastname@example.org. With an initial review, we’ll gather basic information, evaluate your debts and monthly payments, review your credit score, and what your credit report contains. We will also look at sources of income, your property’s estimated value and trends or valuations; and, discuss your monthly budget, cash flow, and other issues. Then we narrow down the possibilities that fit your budget, and if appropriate, formulate a plan to restructure the debt.
It’s true, refinancing your mortgage and consolidating debt can help you to save. Contact ECCU today to get started.