ellenj,
given the choices:

1) home equity loan/line
2) refinance first mortgage (cash out)
3) borrow against 401K

I would probably choose the home equity route, and payoff debt asap.

-jasper

Using a home equity line of $35,000 showed our bank at a rate of 7.19% for 5 years at a payment of 703.52. For all these things now we are paying $1780 and going no where.

I sense a little confusion here. This paragraph gives the impression that you think your payments will go from $1780 to $704? A home-equity loan is what they used to call a "second mortgage". It does not replace your original mortgage; it is a payment in addition to your current mortgage payment. And it may lengthen the amount of time you're paying off debt, depending on how long you have left to pay debts with your current creditors.

If it turns out that consolidating your other loans under a home-equity loan truly will save you money, then it is worth considering if you will be in your house a while longer (your equity right now is based on a housing market that is cooling rapidly) and if you don't mind putting up your house as collateral for your CC and unsecured debt (what a second mortgage does). Don't forget also that you'll pay some administrative fees for that home-equity loan, either in a costs you pay up front or in the form of a higher interest rate (more money spent over time).

The cheapest way to address your non-mortgage debt is to sit down and create a payment schedule that keeps you current on the existing balances and pays extra on the most expensive loans. Actually write down how much extra you plan to pay each month for a given debt, and, when that debt is paid off, tackle the next one.

You also might consider taking DH's annual bonus (however it is) and using most -- if not all -- of it to pay off debts, as well. You're not counting on it anyway; you might as well get something good out of it!

Sorry..maybe I wasn't clear on the whole home equity thing. I'm not figuring our original mortgage amount into the picture. We are leaving that as is. The 35,000 would go toward our other debts. Thats were the decrease in payments comes from. I've decided not to pay unsecured debt with secured debt. It just made sense. Husband can balk all he wants but I won't sign off on that. I'm taking over!

Regardless, after much reading and consideration we decided to forego any type of additional loans. We have gotten into the open credit card balance before and just charged it up again. I made a list of all our debts and their interest rates. By cutting up our cards, will not incurr anymore charges. Need to charge it? Can't afford it! From there I have set myself up a reasonable repayment schedule that will get us debt free in about 2 years. Highest interest first. I figured out my repayment schedule on bankrate.com.

Bonus money goes 1/2 into emergency savings and the balance to the highest debt.

I've been watching the budget show on A & E and it was really an inspiration.

Thanks for the advice.

Here is a link that might be useful: A & E big spender

Sounds like a good plan. At $85k/year, you should be able to live comfortably and still put money away and pay off those bills.

You might try keeping one credit card just in case of an emergency. Freeze it in a big block of ice (like a tupperware container) so you can't use it for impulse purchases. While you wait for the ice to melt, you have time to think about it and decide it's not important. But, if you need to pay for surgery (or whatever) you'll have it there.

Good luck! And keep that hubby in line! ;-)

>>Using a home equity line of $35,000... showed our bank at a rate of 7.19% for 5 years at a payment of 703.52.

Ellen, please remember also that an Equity LINE typically has a floating interest rate. So, if bank prime goes up 2.00% over the course of your outstanding balance, your rate will increase to 9.19% (equity lines typically are priced at some spread to bank prime). A home equity LOAN is typically fixed rate. Based on the rate you were quoted, I am pretty sure it's a floating rate equity LINE.

I would choose getting a home equity LOAN and paying off your debt versus your other options.

Cutting up the cards and closings most of the accounts are good, but I think you still have to pay monthly finance charges.

I would not be inclined to refinance a mortgage at a higher rate. Rather, I would look first at taking out a home equity loan, even if the rate would be slightly higher than the mortgage rate, even after refinancing.

Here's why. Your mortgage is at 6%. Suppose your principal is $137,000, and you want to pay off $35,000 worth of debt. Here are your two choices:

1) Refinance everything at 6.5%
2) Take out a home equity loan at 8% for just the $35,000.

If you take choice (1), you now have $172,000 in debt at 6.5%, which means that your interest is $931.67/month ($172,000 * 6.5% / 12). If you take choice (2), you have two loans:

$137,000 at 6%, with interest of $685/month.
$35,000 at 8%, with interest of $233.33/month.

So with option (2), your total interest is $918.33/month, which is *less* than it would be with option (1)! Moreover, when you've paid off the home equity loan, you can still pay off the rest of your mortgage at 6% instead of the 6.5% you would now have.

The main question is whether you can get a fixed-rate home-equity loan at a reasonable rate, and whether you can afford the payments from what is likely to be a shorter loan term than you would have with refinancing your mortgage. I'm guessing you can, because it has to be a lot cheaper than credit-card debt.

Wow, this thread is MONTHS old... but since Alphacat popped it up to the top of the list, I may as well add some experienced thoughts, and some tools for figuring;

A) ellenj acknowledges playing "powerball" in the OP... something nobody picked up on or commented about. I am assuming "Powerball" is referencing legalized governmental gambling (the most severe wealth tax on the uneducated) along with Lotto, Pull Tabs, et. al. Even having the willingness to voluntarily throw away a single dollar on this (while in significant consumer debt) is indicative of trouble and a core misunderstanding of the basics of money... This is likely seemingly the smallest of issues to address, but the adjustment in money awareness that creates the willingness to do this is the adjustment that will bring EVERYTHING else into effortless alignment.

I recommend looking for a 12-step (or similar, many churches/synagogues offer them) debtors anonymous type social group to attend. Also, depending on where you are, there may be self-improvement "prosperity awareness" groups that focus on experiencing the abundance of life even more without consuming/wasting your precious resources.

B) ellenj considers several refinance options... including a comprehensive consolidation and re-writing of all of her outstanding debt into a new 1st lien home loan, or a piggyback 2nd equity line/loan, or a loan against her 401k. The responses in this thread (avoid the 401k, avoid replacing the 1st, use the 2nd) are common and expectable... but, unfortunately, invariably wrong. The weighted interest costs on the consumer debt is so top-heavy that even comparatively small balances (at high non-tax deductible consumer-level interest rates) will make it far more economically efficient to re-write the entire mess into a new single 1st.

This is completely counterintuitive for most folks, and needs the math done to make it visible & simple. Because of this, I've had a web-calculator created specifically to consider the various balances, each accounts interest rate charge, the borrower's marginal tax bracket, and whether each account is in fact tax affected or not.

Here's the calculator. I invite the OP (and anyone) to explore the actual realities of debt consolidation.

Debt Consolidation Savings-Effect Calculator (with tax treatment)
http://www.nobullmortgage.com/calcsavings.asp

Cheers,
Dave Donhoff
Strategic Equity & Mortgage Planner

Here is a link that might be useful: Debt Consolidation Savings-Effect Calculator (with tax treatment)

Hey Dave,

Please keep in mind that the OP said that the outstanding balance on the mortgage was only $3,000 less than the original mortgage amount.

If I remember right, if you refinance a mortgage, the interest is deductible only up to the amount represented by the balance of the original mortgage, unless the loan is used to add value to the house. So if I'm right, when you run your calculator, you should assume that all but $3,000 of the refinanced amount becomes non-deductible.

Hi Alphacat,

If I remember right, if you refinance a mortgage, the interest is deductible only up to the amount represented by the balance of the original mortgage, unless the loan is used to add value to the house.

No... not quite. On a principal residence or second home, all purchase mortgage interest plus up to the interest on up to an additional $100,000 is fully deductible.

So if I'm right, when you run your calculator, you should assume that all but $3,000 of the refinanced amount becomes non-deductible.

What you MIGHT be getting confused into the process is this;
Loan POINTS on a refi are generally deductible only on an amortized basis, UNLESS the funds liquidated from equity are used to improve the home... and are then deductible in the year incurred.

So... the calculator IS programmed to reflect the full standard deductions.

Cheers,
Dave Donhoff
Strategic Equity & Mortgage Planner

Hello Ellen J,

It seems to me that you have two kinds of debt, possibly three.

You bought a large asset that very few people are able to pay for with cash, namely a home.

It will be an asset that will provide benefit for years, may go up in value.

You paid for it with a large mortgage - I note that the amount of the mortgage was close to the purchase price, so you had a minimal down payment apparently.

You didn't refer to student loans, which are a major debt carried by many youngish people. They, too, are an investment from which one expects to receive a benefit for many years. Consequently one can justify paying for it over an extended period - though the longer time that it takes, the lower standard of living one will enjoy throughout that period, due to ongoing interest costs.

However - how long are you willing to pay for a loaf of bread, a night out on the town, or substantial repairs to your vehicle?

Thirty years? The life of a mortgage?

Most credit card debt is incurred to purchase things or services that we use up right away, or over a short period.

If we pay off outstanding balances right away, we are living within our means, but if we carry outstanding balances owing over a period, we are condemning ourselves to living less high on the hog in future than now, for we enjoyed that dinner out tonight, but are going to continue to pay for it for months, even years.

An extra cost is that which we pay in interest on that loan.

If we carry the outstanding balance over the end of the year, then we will live less well next year, for we have that interest added to the debt, every month.

With credit card debts, the rate is high.

And almost always non-deductible.

It seems to me that you should resolve to go into emergency saving mode and pay off those current debts as soon as possible.

I am not in favour of adding them to a mortgage, thus paying them over 30 years or so. Do you want to be still paying for a loaf of bread in 2017 that you ate in 2006? I think not.

I am reluctant to suggest that you make your savings plan drastic, as I gather from your message that you and hubby are not entirely in agreement as to the way to handle this issue, so you may well have less than enthusiastic agreement from him as to how to deal with this issue.

By the way, I agree that you should plan to pay for stuff in cash, refusing to use the credit cards. Keep one in hand, though, in case of dire emergency need. But make sure that you use it for nothing else.

Are you a kid or a grown up?

I have some reservation about using part of hubby's bonus for emergency fund, though as a personal financial advisor I tell people all the time that they should have one as a high priority item in their financial agenda.

However, if you are paying the 18% - 28% or so interest rates on current outstanding credit card balances, doesn't it make more sense to use most of the available bonus to pay down those current debts, knowing that the one or two credit cards that you have on hand can be used to cover emergencies - and you won't have to start paying interest on such debts until you incur them, but you're paying high rates on current debt now.

Good wishes for making the best decision in this circumstance, and for having the self-will and courage to see it through.

Good wishes for learning how money works. It's an interesting hobby - and one of the few hobbies that pays well. If you don't boss your money - it'll boss you.

ole joyful

Dave,

I just checked the IRS website, and it appears that we were both wrong.

The rule is that when you take out a second loan, your interest deduction is limited to the amount corresponding to a principal equal to the "fair market value" FMV of the house at the time of the loan, which might be more or less than the original purchase price. Moreover, you are limited to deducting the interest on $100,000 in any event.

The IRS website gives the following example, which is similar to the present situation except for the specific numbers:

You bought a home in 1999. You currently owe $95,000 on the mortgage and the home is currently worth $110,000.

In that case, if you take out a home equity loan, you can deduct the interest only on the first $15,000 of the loan ($110,000-$95,000).

If you refinance the entire mortgage rather than taking out a home equity loan, the situation is equivalent: The amount of the mortgage that was refinanced is still considered home acquisition debt, and any part of the mortgage beyond that is considered home equity debt.

In other words, you refinanced your loan for $130,000, the interest on the $95,000 you previously owed would still be deductible, as would the interest on the $15,000 that would bring the loan up to the fair market value of the house. Any money borrowed beyond that would have non-deductible interest.

I have attached a link to the relevant page of the IRS website. The details are in "Part II: Limits on Home Mortgage Interest Deduction"

Here is a link that might be useful: IRS Publication 936

Hi Alphacat,

Thanks for the IRS citation... always helpful. If you re-read my post, you just reiterated what I wrote.

Cheers,
Dave Donhoff
Strategic Equity & Mortgage Planner

I don't think I quite reiterated what you wrote.

You said:

On a principal residence or second home, all purchase mortgage interest plus up to the interest on up to an additional $100,000 is fully deductible.

But it's not up to an additional $100,000 -- it's capped by the current market value of the home. Or at least that's how I understand the IRS web page.

Here's an example of the difference. Suppose I buy a home for $200,000, and take out a mortgage for $180,000. A few years later, the value of the home has gone up to $220,000, and I've paid down the mortgage to $160,000.

Then I believe that if I take out a home equity loan for $100,000, I can deduct only 60% of the interest, because the total amount I have financed ($160,000 + $100,000) exceeds the market value of the home ($220,000) by $40,000. So the interest on that $40,000 is not deductible.

I believe you were saying that the interest on the entire $100,000 is deductible, and I think that doesn't match the IRS website.

It is entirely possible that I'm missing something -- and if so, it's important; so I would appreciate it if you could take another look.

Hi Alphacat,

You said:
On a principal residence or second home, all purchase mortgage interest plus up to the interest on up to an additional $100,000 is fully deductible.
But it's not up to an additional $100,000 -- it's capped by the current market value of the home. Or at least that's how I understand the IRS web page.

BUGGERS!!!

It is entirely possible that I'm missing something -- and if so, it's important; so I would appreciate it if you could take another look.

No... you missed nothing... it was me "ass-u-me-ing" again... sorry....

You are completely correct; Equity refinanced above the actual current property value cannot be interest deducted (bahhh!)

You caught me being blind in a blindspot. There are *almost no* home equity financing programs that allow loans totalling above the actual current market value of the home. The very few exceptions to this rule are loan programs where the qualifying restrictions are so tight that 'anyone who qualifies wouldn't want it anyway.'

SO... you are correct... and my deepest bow in apology.

Cheers,
Dave Donhoff
Strategic Equity & Mortgage Planner

Boy, this really generated a lot of activity after so long.

Here's what we have decided to do.

We only had 2 credit cards to begin with. We cut up the one with the higher interest and will have it paid off by the end of March. The other will be paid off in full within the year. We have kept it because my husband needs it when he travels (hotels, airfare, etc), but he is reimbursed by his company and the $$$ go right to that.

We have given up paying for anything else with credit. We have started a saving account for bigger items we need (fence for the yard, home repairs, etc). When we have the $$$, we will get them.

We should be debt free (less the mortgage)in about 2 years.

We have no student loans. They are paid off.

My used car should be paid off within 2 years. I'm OK with driving it until it falls apart. My husband gets a brand new company car every 50,000 miles. We can both drive it and they pay for all the gas, insurance, repairs, etc. We are allowed to use it personal use also.

I work at a private University and part of our package is free tuition/books for our children. A savings of about $250,000 for both our kids. They can come out with a degree debt free. They are on their own for their masters.

We have decided not go with any sort of home equity, as I don't want to used secured debt to cover unsecured debt.

I am also considering a part time job over the summer (I'm off) to pay down some smaller things.

My teenager is now old enough to get a part time job to cover her expenses. She will be paying for her cell phone and all her own clothes, in addition to her spending money.

Thanks for the advice.

Hi ellenj,

Some comments & kindly advice;

We only had 2 credit cards to begin with. We cut up the one with the higher interest and will have it paid off by the end of March.

Cutting up, mutilating, spindling, splaying, folding, creasing, contorting, insulting, etc.... ALL of these options are fine.... HOWEVER, whatever you do, KEEP THE ACCOUNT OPEN!

Closing the account will reduce your unused but-available credit, and skew your consumer debt ratios to appear more heavily in debt (as a percentage) than you actually are, pulling your credit scores down.

We have decided not go with any sort of home equity, as I don't want to used secured debt to cover unsecured debt.

Be aware that this is an emotionaly strategy, not a financially supported strategy. By carrying unsecured consumer debt unecessarily (when you could have otherwise restructured it into tax-deductible home leverage) you are paying more of your family's net income toward debt... which means pushing off financial safety and security further into the future than necessary.

If you are responsible enough to pay your bills consistently, regardless of which creditors they are sent from... then you are far better advised to structure yoru finances for the lowest net interest costs, the lowest equity risks, and the best family net-worth growth.

Hope that helps.
Dave Donhoff
Strategic Equity & Mortgage Planner

No where did I say I was closing any accounts. I have cut up the cards so they are no longer used.

I disagree with using secured debt to cover my unsecured debt. Why should I risk my home for credit cards? I have read every book and watched every show and they specifically say not to cover my debt with home equity. I will be paid off with 2 years.

The only ones who suggest I used a home equity are banks because they are getting a cut.

Don't think I don't know how I got into this mess. I am taking steps to remedy my situation without getting into a mess again.

Hi ellenj,

No where did I say I was closing any accounts. I have cut up the cards so they are no longer used.

Excellent! You didn't say whether you would leave open, or close entirely. the accounts... and many people who don't know better close them.

I disagree with using secured debt to cover my unsecured debt. Why should I risk my home for credit cards?

If your management of your credit is still unstable, yet you can afford the heavier costs of the consumer credit, then I agree... pay the higher credit costs on the unsecured debt while still at risk of defaulting in order to avoid defaulting on secured credit.

If, on the other hand, you DO have your personal budget and spending habits under control, then streamlining your costs of credit is a wise thing to do. The added costs of the consumer rates (merely to avoid home loan responsibility) is a significant burden for many who are pulling themselves out of the fire of bad debt.

I have read every book and watched every show and they specifically say not to cover my debt with home equity. I will be paid off with 2 years.

There ARE books and shows and gurus that target the less financially educated... these gurus generally paint all credit as equal (and equally bad.) This is a good thing for people who can't understand or manage the differences... for sure!

The are ALSO excellent books, materials, and teachers who provide very responsible and effective knowledge about how to manage personal finances on a responsible basis for thos who are comfortable in that position.

Neither is a "one size fits all" thing... every person needs to responsibly determine where they, themselves, are in the financial learning and maturity curve.

I am happy to read that you are on track to eliminate your consumer balances in 2 years.

The only ones who suggest I used a home equity are banks because they are getting a cut.

The banks get a MUCH LARGER cut by you continuing to pay your consumer credit account interest rates... just to be clear. The banks especially hate you trading out your high credit card rates for lower home leverage rates. You pay them much less interest when you do so.

Don't think I don't know how I got into this mess. I am taking steps to remedy my situation without getting into a mess again.

Excellent! Self-awareness is the first (and most critical) aspect of financial success.

I applaud your discipline!!!

Cheers,
Dave Donhoff
Strategic Equity & Mortgage Planner