Brilliant idea? Doubtful...

[Shoshana]

I have a primary mortgage and a secondary mortgage, both of which total the appraised value of my house. I've had the 30-yr, 9.75% fixed, second mortgage for less than a year. The principal is $14,800. The payments are $132 and I've been paying $75 extra per month.

I have a credit card with a zero balance and an $11,500 credit limit. I received blank checks from the credit card company and called them today to see if I could use a check to pay off most of my second mortgage.

Here's how it would work:

I could pay a fee of $200 and receive $11,200. The minimum monthly payment would be $225 and the interest rate would be 2.99% for the life of balance.

14,800 - 11,200 = 3600 remaining on the mortgage.

I know I'd lose the tax deduction, but is there anything else I'm missing? It seems like it would be a brilliant idea (and having had so few brilliant fiscal ideas in my life, I'm worried!) to pay 2.99% instead of 9.75%.

What do you think?

[StaceyS]

I don't think the tax deduction would be worth paying the extra percentages. Looks brilliant to me...

[FrugalMomof3]

I think it's a good idea since the interest of 2.99 is much better, how much would you still have to pay on the remaining 3600? If I am correct your payment would still be $132 + the $75 you pay extra correct?

So all in all you are paying: $225 + $132 + $75, just think that now you have an additional $225 payment per month, is this something you can afford?

[sdrjeolsen]

Sounds like a good idea to me if:

1. you don't charge anything else on the card. Usually purchases are at a different, higher rate, and the payment goes to the lowest rate first till paid in full. So interest will continue to accumulate on the purchases at the higher rate till the other is paid off.

2. The 200 fee is not at a higher rate. Usually they are. We did the same thing once and the $75 fee we paid was at something like 16.99%, so it can start to add up if the fee's interest is at a higher rate. (at 16.99 for 10 years the 200 fee will be 1071.19 with interest) But even so, you's still do better than 9.75% minus the tax deduction you would lose.

If you do it, Just make sure you absolutely DO NOT charge a single thing till the card is paid off, you see how quickly the 200 fee adds interest by the end.

[Frugal Nurse]

I agree with the posters here.
Excellent advice.

Important to look at the fine print. What will happen if you're late on the payment. Will the rate go up?
You're certain it's 2.99% for the LIFE of the card?
Please please please tell us all what card that is. I want it.

I like the idea of rolling a larger interest into a smaller interest- cuz I really hate to pay the bank interest.

Is there anyway you can pay off the remaining 2nd mortgage? rather than have 3 bills. (part 1 and part 2 of 2nd mortgage, the 1st mortgage).

Can you ask the creditor for a $14, 500 limit? they may consider it.

And get that paid off quick quick.

Let us know what you decide.

[Shoshana]

I think (I hope!) I've found a better solution.

I would have had to pay $225 for the CC in addition to $132 for the mortgage and I was worried that things would be too tight. I called the mortgage company to ask if I could lower the $132 monthly payment if I made a lump sum payment of $10K.

I was paying 9.75% for the $15K second mortgage and 7% for the first mortgage. The woman I spoke with wondered why my interests rates were so high even though I have good credit -- it's because I used a mortgage broker even though I didn't realize that's why I was doing when I went to a local mortgage company for financing my house. I'm now in the process of refinancing both of the mortgages into one with an interest rate of 6.125% for five years. Instead of paying $945 per month plus an additional $75 for towards principal, I'll be paying a minimum of $707 per month and will be able to put more towards the principal. I was so thrilled to get such a good rate -- I just wish it hadn't taken me three years to figure out to call and ask for help!!

Thanks for listening, and for your advice!

[prftstrngr]

Now.....freeze that credit card in a jar of water so you arent tempted to use it!! hehe! Thats great about the mortgage! Sounds like a better idea than using the card...they make me nervous. Im sure they would find a way to increase it for some silly reason.

[Luv2BeFrugal]

Awesome deal!! That's exciting!! Think of all the extra you'll be able to send to the principal!!

[Greebo]

Better move, because you were going to hurt yourself moving the debt onto a CC.

Because, unless my math is very much wrong, and at 5:51 am it might be, the numbers didn't add up.

On your second, your tax deduction if you're in the 25% bracket amounts to $3,600/yr in less taxes paid.

The interest rate of 9.75% times $14,800 = $1,443
The interest rate of 2.99% times $14,800 = $442.52
So you will save $1,000 in interest to lose $3,600 in tax refund, in the first year alone.

BUT you said fixed for 5 years. That means you're lining up an ARM, and if your payment is about $707, then I believe one of two things must be true. 1: Either your total mortgage after refi will be for ballpark $80? $85?, or 2: You're paying interest only. Oh - I suppose you could be in Canada, I know the mortgages there are different, in which case you can skip the rest of this post. Or my assumptions could be completely wrong, in which case, please correct me.

If in the USA, then I don't like either option, frankly. Paying extra on the arm is good, but ARMs themselves are bad, IMO. Rates aren't gonna go down much from where we are now. Interest only, otoh, are just plain evil, and if something tempts you into only paying the minimum for whatever reason, well...bad, bad bad.

IMO - refi into a FIFTEEN year fixed. You will get a lower rate than a 30 (around 6% in many places), your payments will be about $700, and you can still make extra payments, but even if you don't, much MORE of your basic payment will go towards principle from day 1.

It would be helpful if we had more information. What is your location, the value of your house, and the amount of the first mortgage?

[Russ]

Originally Posted by Greebo

IMO - refi into a FIFTEEN year fixed. You will get a lower rate than a 30 (around 6% in many places), your payments will be about $700, and you can still make extra payments, but even if you don't, much MORE of your basic payment will go towards principle from day 1.

The only problem I have with this is you are stuck with that payment. I have a 15 year mortgage because I got an interest rate of 4.75%. I love the interest rate, but hate the high payment and given my fears right now, I wish I would have gotten the 30 year with a slightly higher rate. But, wish in one hand and... you know the rest.

[Shoshana]

You're right. It's a 5-1 ARM, 6.12% interest only loan. I live in the upper midwest. The house was appraised last year at $155K. The first mortgage is approximately $122K (7%) and the second is $14K (9.75%).

I was paying $945 for both mortgages with an extra $75 towards principal on the smaller loan. I plan to pay off a CC and then snowball that $$ into the principal. I'm not sure I could afford the monthly payments on a 15 yr fixed.

Other data: I'm single, have $150K in savings and retirement, have a nearly 5 yr old dd, tenured professor, and make $55K. My salary will increase minimally but I do have job security. There is a good chance I'll inherit enough $$ to pay off the mortage within the next few years.

I'll admit, I'm book smart but fiscally stupid and if doing this is a financial mistake, it will just be one of many. I truly appreciate any advice and suggestions.

Thanks very much.

[Greebo]

Originally Posted by Shoshana

You're right. It's a 5-1 ARM, 6.12% interest only loan. I live in the upper midwest. The house was appraised last year at $155K. The first mortgage is approximately $122K (7%) and the second is $14K (9.75%).

First, thanks for the info.
Second, please, PLEASE, **PLEASE** don't do the interest only ARM. It's a great product for the bank, not for you. In 5 years, your house will not be paid off, and there is no guarantee (and IMO not much chance) that rates will be much better in 5 years. Not to mention, since its interest only, any month you don't pay extra, you gain 0 ground.

I was paying $945 for both mortgages with an extra $75 towards principal on the smaller loan. I plan to pay off a CC and then snowball that $$ into the principal. I'm not sure I could afford the monthly payments on a 15 yr fixed.

A 15 yr fixed would push your payment up to about $1,100/mo. So lets forget that for now and talk 30 yr fixed.

I used http://www.bankrate.com to lookup rates in Montana. A 30 yr fixed on $136,000 can get a rate in the 6.25-6.8% interest rate. The payments would be in the $800's. Lets say its $850. You are at
87% LTV which means you're paying PMI. That will push your monthly up. Also, the $850 doesn't factor in escrow costs (taxes/insurance), which will also bump your payment.

So it may be that a refi really isn't your best choice right now. I'm pretty risk averse tho - I mean the ARM *will* lower your monthly payment, but I don't think its worth the increased risk, and a refi will consolidate the debt but not make anything cheaper, monthly.

Other data: I'm single, have $150K in savings and retirement, have a nearly 5 yr old dd, tenured professor, and make $55K. My salary will increase minimally but I do have job security. There is a good chance I'll inherit enough $$ to pay off the mortage within the next few years.

There is no reason to touch your retirement account. How much have you got in savings, and at what rate. And how much else do you owe- your CC Balance and rate, and what about car payment and rate?

The fuller a financial picture you can paint for us, the better we can evaluate. (Bearing in mind, none of us are financial planners, and no advice is guaranteed )

[Shoshana]

There is no reason to touch your retirement account. How much have you got in savings, and at what rate. And how much else do you owe- your CC Balance and rate, and what about car payment and rate?

$55000 mutual funds
$73000 annuity (this amount is the guaranteed "high")
$70000 retirement (making minimum contribution to receive maximum contribution from employer)

$8000 credit card debit @ 2.99%

no other debt!

If the interest must be be paid, why does it matter if I pay if first and the principal second (interest only loan), or (conventional loan) pay both concurrently?

I was paying $1029 but it was tight. I've made some changes in my lifestyle and budget (i.e., no cell phone, soon to cancel TV, $50 per week savings in child care expenses) that will make it easier to pay this amount if I need to.

Thanks!

[Greebo]

Originally Posted by Shoshana

$55000 mutual funds
$73000 annuity (this amount is the guaranteed "high")
$70000 retirement (making minimum contribution to receive maximum contribution from employer)

Ok this to me reads like its all retirement money, so don't touch it. You might, however, consider halting contributions to retirement SHORT TERM while you pay down the debt.

However, with

$8000 credit card debit @ 2.99%

this low rate, maybe not... How much on a monthly basis are you putting into the retirement fund (excluding matching)?

If the interest must be be paid, why does it matter if I pay if first and the principal second (interest only loan), or (conventional loan) pay both concurrently?

Compound interest.

At 6% compounded monthly, $1.00 over 30 years will cost you $6.21 in interest. (Edited 2x to get the right number)

Every dollar of principle you pay down early saves you multiples in interest NOT paid later.

So you NEVER, EVER, EVER, want to only pay interest. ALWAYS put something down on principle. As much as you can.

[Shoshana]

Ok this to me reads like its all retirement money, so don't touch it. You might, however, consider halting contributions to retirement SHORT TERM while you pay down the debt.

However, with

this low rate, maybe not... How much on a monthly basis are you putting into the retirement fund (excluding matching)?

No, the $55000 mutual funds is not retirement. It's divided into two accounts, one totals only $2500 and I pay $50 per month into that one. I don't make any contribution to the remainder. I pay an additional $50 into an ING savings account ("emergency fund" but right now the balance is -0-.)

I contribute $225 to the sheltered retirement through work which is the minimum I need to contribute to receive matching funds.

And yes, the CC debit is 2.99% for the life of the loan.
I think I'm beginning to understand why interest only is a bad idea. It means that I'll be paying MORE over the life of the loan than if I were to have a standard fixed mortgage, right?

edited to add: I just checked a local bank with a good mortgage reputation and here are their rates:
30 Year Fixed Rate Rate APR Points
6.500% 6.574% 0.000%
15 Year Fixed Rate Rate APR Points
6.125% 6.246% 0.000%