Last week I said a resounding no to consolidating some of our debt using the equity in our house by refinancing our mortgage. Mr Wooly agreed with the decision, once I explained what the mortgage broker had told me.
It all started with a phone call from the bank several months ago asking if we would be interested in consolidating our loans onto our mortgage. It sounded good, and would definitely make our monthly payments more manageable.
Several months later we finally got around to investigating this wonderful sounding option. But it really is not a good option, as I realized very quickly in the conversation with the mortgage broker.
First, he launched right into the process and started asking me questions which sounded very similar to all the questions we had a year ago when we initially applied for a mortgage. I had to stop him, and ask him really what our options were. He replied that he understood from the bank that we were interested in refinancing our mortgage.
And therein lay the disconnect. I quickly told him that no, we were not at all interested in refinancing. I understand enough about our mortgage to know that: 1) interest rates have gone up by at least 1% since last year, and 2) there are large penalties for refinancing a mortgage before the end of the term.
What I had thought this magic solution would be was simply an increase of the amount of the mortgage under the same terms. In hindsight, this was pretty naive, and too good to be true, but live and learn.
I talked a little bit longer with the broker, he was very kind, and answered all my questions. There are options for lines of credits borrowed against the equity of our home, but usually there needs to be more equity in the home than we have. Our current equity is about $25-30,000 over and above the $230,000 we owe on the mortgage. This is not enough for the line of credit apparently, which is fine, I don't want more revolving credit.
Another key issue we cleared up is this: yes our debt load is high, but it is not (with the exception of $2500 soon to be paid off) credit card debt, meaning that even a secured line of credit may not save us any money in lower interest rates. About half of the debt is student loan debt, with very low interest rates. $8600 of the debt is actually a very low interest loan from my parents.
If we were to refinance (for some crazy reason), guess what? We would end up owing at least $5,000 more to the bank than if we continue to pay our loans off one at a time. Seems like a better deal for them than us I tell you!
Sure enough though, I called the telephone bank to ask about a bank charge on my account and the customer sales rep asked, as they now do every time I call, if I was interested in applying for a line of credit using our home as equity. You just know that when the bank offers what appears to be "help" that it can't be as good as it sounds!
Sigh, hopefully getting a little more savvy and money wise every day....
W.W.
