The first week of 2015 has come and gone. Statistically, 25% of people who made a New Years Resolution have now given up on it. If you’re one of many people who made the resolution to pay down your debt- you’re not alone.
If you currently own your home, refinancing your mortgage to consolidate your debt in to one easy payment is a great way to get a handle on it, especially with today’s low rates. With the money you save by not paying 18-24% interest on your credit cards, you’ll be on your way to becoming debt free.
Here’s one example:
John and Cindy currently owe $252,795 on their home that is worth $355,000. They also owe $18,000 on a credit card that they have maxed out, and besides it starting to hurt their credit rating, they are paying interest on that money at the credit card’s rate of 19.99%! They are currently paying a minimum of $295 each month in interest on this credit card and are not paying down any principal. For the purpose of this example, we will use the same mortgage rate and amortization on their existing mortgage and the new mortgage to show you only the difference that consolidating their debt makes. Using 2.89% on a 5 year fixed mortgage amortized over 30 years, refinancing John and Cindy’s current mortgage (which has 18 months remaining on it) to pay off the $18,000 credit card, will bring their principal balance from $252,795 to $270,795, and will actually bring their monthly mortgage payment down from $1136.48/month to $1123.18/month. Why down you ask? Because their currently monthly payment is based on $274,000 that they borrowed 3.5 years ago. But since no closed mortgage is broken without penalty, as you may know, John and Cindy ask for their penalty of $1826 and their legal fees of $750 to be added to their mortgage so they’re not out of pocket this amount. Doing so, brings their monthly liability to $1133.87, which is now $297.61/month less than they have been paying between their mortgage payment and the interest on their credit card.
Now here is where we tackle this debt! By increasing John and Cindy’s mortgage payment by that $297.61/month back to the same as they have been paying each month, we get them on track to getting this debit paid down.
Current Situation: New Situation:
$252,795 mortgage $273,371 mortgage
$18,000 credit card $0 credit card
Total Monthly Payments: approx. $1431.48 Total Monthly Payment: $1431.48
Total interest paid/ month: approx. $895.00 Total interest paid /month: approx. $640.00
Balance owing in 18 months: $261,034.07 Balance owing in 18 months: $259,206.39
In the first 18 months they will have paid down $1827.68 of their debt that they otherwise would not have been able to do! It’s a great start, and most importantly, John and Cindy have protected their precious credit ratings! In addition, they have secured themselves another 5 years at 2.89% now while it’s still available.
If you would like more information on debt consolidation please contact us, we’re here to help!