Dear Alpha Consumer,
I own my home with my husband. Our mortgage balance is $135,000. We also have $30K in credit card debt, which is where the big problem is.
The interest is killing me, and I cannot make a dent in the balances. I no longer use these cards as I am trying to pay them off. Should I refinance and lump this credit card debt into my mortgage? I could get an adjustable rate mortgage at an interest rate of around 5 percent. (My house was recently appraised for $225,000.)
I am also about to get divorced, and it looks like refinancing is the only way I can keep my house, which was a gift from my parents, and also get rid of my debt. But it makes me very nervous to have such a high mortgage balance and be a single parent. The other option I have explored is debt settlement, which my mortgage lender said will look like bankruptcy on my credit report. How long would that affect my credit report and score?
My financial situation is causing me stress, anxiety, and sleeplessness. I would like to resolve this as soon as possible.
Debt—especially debt from multiple sources—can quickly become overwhelming. Divorce, which usually means a lower household income, adds another challenge. To figure out your next step, start by estimating your future income, post divorce, and then calculating what you can afford to pay along with the risks you are willing to take.
Refinancing your home to absorb the credit card debt would almost certainly reduce your monthly interest payments. A rate in the mid to high teens, such as 17 percent, is not unusual. Your mortgage rate, on the other hand, would be around 5 percent, at least temporarily. By folding the high-interest credit card debt into the mortgage, you could save hundreds of dollars a month, says Michele Noble, a mortgage specialist at Bank of America Consumer Real Estate.
"Interest on the credit card is far greater than it would be on the house mortgage, and interest from the mortgage is tax deductible." says Kathleen Miller, author of Fair Share Divorce for Women and president of Miller Advisors, an investment advisory firm in Kirkland, Wash. "I would refinance for both those reasons."
But be careful. Refinancing will also increase your risk of foreclosure, which would probably hurt a lot more than the bad credit score from failing to make credit card payments. "If you couldn't make the [mortgage] payments, then the first thing they would do is foreclose on your house," says Raul Vazquez, cofounder of LivingWithBadCredit.com. But if you fail to make credit card payments, he says, the worst that can happen is that the credit card companies sue you for the money. They can't go after your house.
The other risk factor is getting an adjustable rate mortgage, which can easily balloon after a couple of years, as many homeowners are now fully realizing. A fixed-rate mortgage for borrowers with good credit now ranges between 6 and 8 percent, according to Bankrate.com.
The bottom line, says Mark Carlyle, vice president of DebtHelp.com, is that if you can comfortably afford the new mortgage payments and discipline yourself to stop charging up credit cards, then refinancing is probably a good idea. "However, if you think you're going to use the credit cards again, or if you don't have good enough credit to get a prime-rate mortgage, then don't risk your house," he says.
Other options include debt settlement and filing for bankruptcy, both of which involve paying none or a fraction of the debt that is owed. Both will stay on your credit report for seven to 10 years and will temporarily hurt your score. You can, however, begin rebuilding it almost immediately.
Meanwhile, on the divorce front, you'll want to be sure to separate your credit from your husband's and, because the house was a gift from your parents, look into your state's laws on whether that inheritance will be considered joint property or not.