A reader using the FreeRateSearch.com site asks:
Q: Should the monthly debt for rate search include credit card minimum payments, student and auto loans only, or must it include other debts such as first mortgage payments, utilities, insurance, etc.?
A: The FreeRateSearch.com engine automatically calculates your debt-to-income ratio for your new proposed mortgage loan so don’t include it. You only need to list other non-mortgage debt payments (such as credit card minimum payments, student and auto loans). Utilities are never included in calculating mortgage debt ratios.
“Jason” asks us:
My wife and I are contemplating refinancing our mortgage to payoff our credit card & auto loan debt. We are in the 1st year of a recent home purchase and have a loan balance of 154,500 @ 5.875% for 30 yrs. (fixed). Our current monthly payment is $913, and with the other debt added in, comes to $1325 monthly. Our credit card debt is $7,300 (paying $150 monthly), and the amount owed on the auto loan is $13,200 (paying $260 monthly). We plan on staying in our house for at least the next 20 years.
Jason: This is a great question. There are several things you need to think about here. First is the fact that you have a great 30-year fixed rate loan. I’d hate to see your interest rate go up and it very well could. Use our system to find out what’s available to you today.
Secondly refinancing will carry closing costs. If you opt for a “no closing cost” option, closing costs will be built into the loan and you will pay a higher interest rate. That could become more costly in the long run.
Finally, you may not have enough equity to do what you consolidate, pay closing costs, and keep your home loan balance below 80% of your home’s value, which is recommended in today’s market.
I’d recommend you do a couple of things instead. One is to get your FICO scores and if they are not as high as you would like, start working on getting them there. The higher your scores, the more negotiating power you have with creditors and the easier it is for you to get better rates.
Second, negotiate the lowest rate possible on your credit card. Call and ask! If your current issuer won’t budge, consider getting a card you can use to transfer the balance.
Third, look for any extra money you can to retire the credit card debt more quickly. Your payments are currently too small to make much of a dent in the balance. Track your spending to see where you can make some changes. Consider selling things you don’t need anymore on ebay etc.
Finally, given what you’d told me, if you really want to use home equity I would recommend a home equity loan or line of credit over refinancing the entire loan.
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