One of the things that we’ve never really been good with is money. It’s amazing what you can do with money once you start paying attention and learn a little bit about it. Unfortunately personal finance isn’t something that we are taught in school. Some people are naturally really good with it, we were not!
So during our journey to becoming debt free, I will be sharing things that I’ve learned in hopes that it will help someone else make smart financial decisions.
We refinanced our home about a week ago and thought this was a good time to talk about this subject.
If you haven’t refinanced in a while, you really should! The rates are at all time low. We were driving home from the store yesterday and saw 2.75% on a 15 year mortgage. Wow.
The reason I’m writing about not consolidating debt into the mortgage refinance is because we have credit card debt and at one point hubby suggested we just roll some of it into the mortgage..UH, UH, No Way!!! And here’s why:
1. Makes you feel like you’ve done something about your debt..when you haven’t. You did nothing to help improve your debt situation. All you did was move the debt from one debtor to another. The pressure is off and you stop worrying about it. Sure the credit card interest is higher than that of the mortgage..but that’s where you feel the pain and will do whatever you can to get that puppy paid off asap.
2. It is more costly in the long run. As stated above, the mortgage interest may be lower than your credit card, but most people refinance to a 30 year mortgage. Over the life of the home loan, you are not only paying significantly more in interest on the credit cards, but your house too. If you kill those credits cards over a period of a couple of years, even though the interest is higher, you will pay less in interest.
3. You may have to pay PMI (Private Mortgage Insurance). If you roll your debt into the mortgage and because of the larger loan you don’t have at least 20% equity in your home, mortgage companies will require PMI. Which protects the lender in case of a default on the loan. Each lender has a different method of calculating this, but it can run you about an extra $80- $100 per month.
4. People borrow more than they need. Lenders will try to get you to borrow more money than you actually need to pay off the first lender. Mine did! A lot of people take advantage of this (or else they wouldn’t offer it to you every single time). They are great sales people and will tell you that you can upgrade to a better car, or fix up your house or get that new entertainment system you’ve been wanting. Don’t Do It!!!
5. You have not dealt with the problem only the symptom. I truly believe that this is the biggest problem with consolidations. The symptom is the debt…the problem being that you are not good at handling money. I’ve read that up to 78% of people who consolidate their debt build up new debt and end up much worse then before. Unfortunately, that was certainly true for us and something we did about 8 years ago. I wish someone would have explained this to me then! Updated: Here’s a great example, about Why Debt Consolidation Doesn’t Work…Usually. Great read!!
I hope this article has shed some light on the drawbacks of consolidating your debt into a mortgage. I’d love to hear your feedback and your experiences.
Linking up with Thrifty Thursday and Waste Not Want Not Wednesday.