Financial Considerations when Refinancing and Consolidating Home Loans and Credit Card Debt

January 22nd 2006

Credit Considerations

There are some things you should consider before making a decision about refinancing your house. Interest rates may be on the rise so now may be a good time to think about your financial situation and plan a course of action. If interest rates do go up, they will likely go up on credit cards as well.

Since the new bankruptcy laws have taken effect, it is harder to avoid defaulting on unsecured debt like credit card loans. It becomes more appealing for some to place the credit card debt into a refinanced home loan package.

In 1981 the Prime Interest Rate was over 18%. Right now the prime interest rate is a little less than 8%, but that is almost double what it was in 2004. Interest rates go up and down. If you have an adjustable rate home loan and interest rates go up you could be paying more each month. Credit card rate are always well above the Prime interest rate.

You need to consider how long you plan on living in your home. If you plan on moving within 3 years you should try to get a loan without points. A point equals 1 percent of your loan. Points typically are a way of paying interest up front, and may save you money if you own your home for a longer period of time.

You may want to get your fees waived if you plan on moving within the next few years. These fees include application, appraisal and legal fees which can add up to $1500 or more. By waiving the up front costs you may have to accept a slightly higher interest rate.

You may be able to add the closing costs and points to the new mortgage. Does that mean you end up shouldering more debt? If interest rates continue to climb and your new loan is a fixed mortgage, the money you save now can help. Talk to your loan professional about this.

The big advantage to dealing with a loan broker is that you only need to apply once for a loan. Banks can sometimes look upon credit inquiries as a “negative”. Each time you apply for a loan or credit card an inquiry is listed on your credit report. So it may make sense to apply once and sort through the offers.

If you have been making your payments faithfully on your credit card bills and home loan, you stand a good chance of getting some good offers that may save you some money. Make sure your current loan does not have a “prepayment penalty”. You may want to take any previous loan documents you have with you to your financial advisor to make sure a re-fi is in your best interest.