July 2008
Debt consolidation that could put you further in debt
The pitch is tempting: "Combine your first mortgage, your second mortgage, your car loan, and all your high-rate credit-card
debt into one easy loan with one low monthly payment," says the TV ad for Countrywide Financial's Combo Loan. "It could save
you hundreds every month," and let you get cash out.
If you're drowning in debt, this sounds like a no-brainer. But while the ad makes paying just one bill a month sound simple, there are plenty of drawbacks.
The real deal
The Combo Loan is like other debt-consolidation or refinance loans. If you're paying high rates on a first and second mortgage and an auto loan, refinancing all of them into one lower-rate mortgage can make sense provided you have sufficient equity in your home. It can also be smart to refinance a rising-rate adjustable mortgage to a lower-rate fixed one.
But if you consolidate now and your home drops in value, you could end up paying more money than your home is worth. And while it's wise to finance your home for 30 years, when you consolidate you'll also be paying off your car or credit-card bills over that time. You'll have lower monthly payments, but by stretching them out over a longer time period you'll likely pay more overall.
You can also get hit again for the same fees you paid when you first bought your home, such as closing costs and appraisal fees. Countrywide offers an option to let you roll them into the financing, but that will cost you more overall than if you paid them up front. The tax benefits of consolidating (your credit-card or auto debt is now classified as home debt and is tax deductible) might offset some of those costs, however.
Refinancing also heaps on risk. When you have several bills, defaulting on, say, your auto loan won't get you kicked out of your home. But when you fold all your debt into your mortgage, defaulting could cost you your house.
The bottom line
Before jumping at refinancing offers, try using the online calculators at the Mortgage Professor or HSH Associates Web sites to see if you qualify for a new mortgage. Lenders are more tightfisted these days, so you may only be able to borrow 75 to 85 percent of your home's value, which might not be enough to cover all your debts.
Also, in this chaotic market you might see rate swings of 0.25 percent from one day to the next. Compare loans from different lenders on the same day and watch their rates closely to find the best time to consolidate. Then get approved the same day you see a good rate, and lock it in.
If you're in a desperate financial situation, consolidating might make matters worse. You may want to speak with a nonprofit credit counselor to help you decide if refinancing makes sense.
If you're drowning in debt, this sounds like a no-brainer. But while the ad makes paying just one bill a month sound simple, there are plenty of drawbacks.
The real deal
The Combo Loan is like other debt-consolidation or refinance loans. If you're paying high rates on a first and second mortgage and an auto loan, refinancing all of them into one lower-rate mortgage can make sense provided you have sufficient equity in your home. It can also be smart to refinance a rising-rate adjustable mortgage to a lower-rate fixed one.
But if you consolidate now and your home drops in value, you could end up paying more money than your home is worth. And while it's wise to finance your home for 30 years, when you consolidate you'll also be paying off your car or credit-card bills over that time. You'll have lower monthly payments, but by stretching them out over a longer time period you'll likely pay more overall.
You can also get hit again for the same fees you paid when you first bought your home, such as closing costs and appraisal fees. Countrywide offers an option to let you roll them into the financing, but that will cost you more overall than if you paid them up front. The tax benefits of consolidating (your credit-card or auto debt is now classified as home debt and is tax deductible) might offset some of those costs, however.
Refinancing also heaps on risk. When you have several bills, defaulting on, say, your auto loan won't get you kicked out of your home. But when you fold all your debt into your mortgage, defaulting could cost you your house.
The bottom line
Before jumping at refinancing offers, try using the online calculators at the Mortgage Professor or HSH Associates Web sites to see if you qualify for a new mortgage. Lenders are more tightfisted these days, so you may only be able to borrow 75 to 85 percent of your home's value, which might not be enough to cover all your debts.
Also, in this chaotic market you might see rate swings of 0.25 percent from one day to the next. Compare loans from different lenders on the same day and watch their rates closely to find the best time to consolidate. Then get approved the same day you see a good rate, and lock it in.
If you're in a desperate financial situation, consolidating might make matters worse. You may want to speak with a nonprofit credit counselor to help you decide if refinancing makes sense.
