Should I accept Refinance Mortgage Fees

Question

I am in end of a refinance of my mortgage and I am not sure if I should follow through with it or not.

My mortgage is $52,000 appraised value $103,000.
My loan will include paying off 3 credit cards and 1 student loan of $5,000.
My loan will be $66,000 for 30 years at 3.875 (cost includes fee for points).

I am 60 years old and wanted to get rid of debt and refinance.

My current loan is 3.75 and I pay $650 per month.
My new loan will be $720 per month.

Am I making a wise decision? Should I just cancel and pay the bills on my own? I have some CDs that I could cash in to pay for the school loan since I am now 60.

Answer 1

I kind of hate the new mortgage for the following reasons:

1. You are resetting the clock on your mortgage. Hidden in the numbers you give is that you are 30*12*720 from paying off your home. If you keep the current mortgage you will be paid off in less than 8 years. You will still be young.
2. You'll have a higher interest rate on a large balance for a very long time.
3. Your other debts seem tiny.

Given that there are points and fees your total other debt is less than 14K, lets assume its 12k. Could you work a second job and be done with that in a year? I bet you could. Get on a written budget, cut some luxuries, and work a bit more. Throw any extra money you can at your debt. Stop using credit cards.

In one year those other loans could be gone and you will have only 6.5 years left on your mortgage. At that time if you throw the money that you have been spending on the loans at your mortgage, you will pay it off sooner. Could you be debt free by 65? I bet you could. Wouldn't that greatly improve your retirement if you didn't have a house payment.

Get mad at these debts, you can do it! Get the bank off the payroll.

Answer 2

You're not getting rid of any debt - you're just substituting one kind of debt for another. If your boat is sinking moving water from the front to the back doesn't solve the problem. It may slow it down a little but you're still sinking. Plus you're paying the bank money (in terms of refinance fees) to do what is effectively a balance transfer.

Plus, I fear that when things get rocky you'd just go back to using the cards to "get by" (That is not a judgment on you - I have done the same thing myself - it's just how life goes)

I would look at this from other angles:

• What is your income? Can you take on any extra work to increase your income?
• What are your expenses? Is there anything that you can temporarily cut to get things going? (cable, cell phone, dining out, etc.)
• Could you sell the house and get an apartment? You could pay off all of your debt and have close to $40k in the bank - you could rent for while and save up enough to buy another house in the future.

I have some CDs that I could cash in to pay for the school loan since I am now 60.

As long as they're not in a retirement account where you'll pay penalties, then yes I would do this. There's not point earning little to no interest on the CDs when you're probably paying more than 5% on student loans. Then take that monthly payment, put it towards the other debts, and knock them out.

Answer 3

You should not take this refinance. The bulk of your debt ($52,000) is already at a very low 3.75% rate. In order to refinance some higher interest debt, you would be willing to increase both the interest rate, and the length of the payoff. Just that part of the refinance costs you up to an extra $18,000. I don't know the exact amount because you haven't specified the length of time remaining on your current mortgage so I'm making some educated guesses.

Now for the loans you would be consolidating. You haven't specified the amounts and the interest rates of these other loans, but we can assume they are high. Your new loan amount would increase by $14,000, so we do know that if you refinance them at 3.875% over 30 years, you will be paying $23,700 to retire those debts.

So to sum those two figures, you would increase your debt payments somewhere in the range of $40,000 to pay off less than $14,000 worth of credit card and student loan debt.

You could certainly pay back the value of those CDs after retiring the debt for a much lower cost. This would be my first recommendation if you have the discipline to budget and repay your savings after your debts are gone. You could also consider opening a home equity loan rather than refinancing your lower 3.75% rate. The home equity loan would probably cost a little more per month than this total refinance, but you would be out of debt much sooner.