Restructure debt

taemomJune 5, 2006

Hi everyone. I need some quick financial advice if anyone has time! Here it is in a nutshell: Our first mortgage is fixed at 6% and has a balance of $324,000. We have a HELOC with a current balance of $99,000 (prime +1% on this). Additional credit card debt of approximately $75,000 (yes, I know this is huge, and all cards will be destroyed after restructuring). We really need to lower what we pay out each month. My husband's industry has really suffered over the past couple years and income has cut in half. The credit card payments alone are staggering because they have now doubled, and in some cases, tripled the required monthly payments. Our credit is good, so that is not a problem -- it's just the large balances that have affected us.

On to my question: would we be better off doing a complete refinance and rolling everything together or simply doing a home equity loan and combining the HELOC balance and credit card balances? Our current first mtg is only 6%, so if we refinance we'd probably be around 6.875% right now. A refinance would allow us to do a 10-year I-O loan with a fixed rate and our required payments would be lower than they would if we keep the first mortgage as it is and just do a home equity loan (we've been quoted an 8.34% rate on the equity loan amortized over 30 years).

If you have any thoughts on whether I should do the equity loan or do a total refinance of everything, I would REALLY appreciate it. We have been preapproved on the equity loan already, and I've also chatted with the loan officer who placed our first mortgage (I know he has incentive for us to do a refinance since he will make lots more money).

Thank you for listening and for any advice you can offer.

Have a great day!

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what would the costs be o do the total refi??? I'd personally keep my 1st mortgage, and expand your HELOC to take in the CC debt...This should cost you next to nothing..The HELOC should be tax deductible,and a much better rate then the CC rates...Then pay off the HELOC as fast as you can...I wouldn't do a I-O,, as your debt level remains constant, and at least in short term, you can't count on real estate appreciating at the rate of the past few years...

    Bookmark   June 5, 2006 at 2:07PM
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Remember that the HELOC that you take out to pay credit card debt, buy a car, or do anything but buy or improve your home isn't deductible under AMT.

Before you make a decision, check out how close you are to paying AMT. It could have a bearing on your decision.

    Bookmark   June 5, 2006 at 3:40PM
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What are the rates on the card(s)?

How soon do you feel that you may be able to retire them, as things stand?

Credit card debt is usually considered short-term debt, and changing short-term debt into long-term debt usually means that you still pay out a lot of interest - it just takes longer.

None the less, in your current bind (is it such, or likely to become so?) that might be the most advantageous way.

I usually don't like to see people doing that.

How stable are house prices likely to stay in your area? Would a fairly major retrenchment be liable to put you on the street?

ole joyful

    Bookmark   June 5, 2006 at 6:29PM
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Your total debt is a hair under 500,000. Significant amount. I can't see any good way to make that debt OK if husband's business is suffering and your income is dropping. Sounds very precarious. So excuse me if I sound harsh.

BTW, Jlhug is right on the deductability issue. A friend came subject to ATM when a job loss redirected the HELOC dollars. She actually came out better *not* deducting the HELOC at all, as that averted ATM in the end. Weird, huh?

Your home is no longer an ATM machine. Those days are over.

For your situation, you may need to look realistically at family income and stability of that income. Time for a gut check on whether you really have 35-40k to allocate toward debt/mortgage. And whether this even makes sense when you step back. (As joyful points out - you will be paying long term interest on short term cc debt. Not good.) If your income may drop into 5 figures, even high five figures, you could be in trouble. Would you consider downsizing your home/mortgage? Can you beat the stampede of people in the same situation needing to restructure their debt? Or are you in a market where you may not even be able to sell?

If you are well into six figures, you still need to get a grip on spending and commit to some serious discipline. Sounds like scolding, but it is what it is: you have been living beyond your means. Getting out from under your debt is doable, but only with big changes in your spending.

Should you want to or need to stay in your current home, please look at a 15 year note rather than at a 10 I-O note. The I-O is a recipe for more trouble and would get you no closer to where you need to be going - *less in debt*!!

    Bookmark   June 6, 2006 at 12:39AM
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Hope above was not too blunt, but your situation is alarming and seemed to require some straight talk.

I meant also to say good luck with finding a way through this. And it is good you are grappling with it.

    Bookmark   June 6, 2006 at 12:44AM
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Thank you all for the great advice. And Celticmoon -- you're not being too harsh -- just speaking the truth -- thank you for that!

Our income is still well into six figures a year, and the housing market here is still hot (we are in an incredible zip code in central Virginia). I think the best way to go would be the equity loan. And even though it is structured as long-term debt on short-term CC debt, that doesn't mean we can't pay it down as quickly as possible. At this moment, I don't see the CC debt going away anytime soon, and this loan will save us at least $1,500 per month -- significant!

Thank you all again for the kind advice. We are set to close next Thursday! And yes, we will have some SERIOUS changes in our spending habits.

    Bookmark   June 6, 2006 at 12:49PM
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Since you live near Washington, with a number of the fat cats around there who'll be weathering housing storms better than some in less secure areas in case of a major downturn, you may be at lower risk of having the housing bubble burst than many in less advantageous positions.

But debt is debt, and creditors want to get repaid: they insist on it, in fact.

Or they take action - which is often less than palatable.

Keep whittling away at that debt.

I hope that your continued income is quite secure.

It doesn't get as cold in Virginia as it does in Ontario during the winter - but sleeping in the street is no fun, there, either.

ole joyful

    Bookmark   June 6, 2006 at 8:08PM
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