It is a tempting proposition to roll credit card debt into a mortgage.
Here's the scenario:
We owe $145,000 on our mortgage and we'd like to refinance. We've been paying 6 years on it. We can get a 30-year fixed mortgage at 4.12% and we thought about rolling our credit card debt into that mortgage. We owe about $18,000 on five cards with interest ranging from 18.5% to 29.6%. Is this a good idea?
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As a finance coach this question came off often with my clients. One monthly payment, no credit cards late fees, lower interest rate: they sound like fabulous reasons and by themselves, they are legitimate things to consider.
But when you think about rolling credit card debt into a mortgage there is much more to look at.
What To Consider
Long term interest cost
At 4.12% you will pay $13,405 in interest over the 30-year life of the loan on JUST the $18,000 of credit card debt.
If you pay just the minimum payment on that credit card debt you will pay around $11,000 in interest but you'll have the debit paid off in around 5 years. (Assuming 23% interest). If you can pay more each month your lifetime interest will be less.
Pay off vs product longevity
What did you charge? Groceries, auto fuel, Christmas gifts, vacations? Do you really want to be paying off your groceries from 2018 in 2042?
Maybe you charged a new washer and dryer is about 11 years. Do you want to still be paying off this one when you have to buy another one?
What can your monthly finance plan handle?
This is often the driving factor in the decision-making. The stress and weight of that monthly make rolling existing credit card debt into a mortgage sound so tempting.
Let's assume the current mortgage payment is $1200 (not including taxes, insurance, and PMI, if applicable) and the credit cards are $500.
That means you're laying out roughly $1700 a month.
The new mortgage and credit cards would be around $789 (not including taxes, insurance, and PMI, if applicable). That's almost $1,000 saving a month!
In some cases it makes sense. If you're at risk to have necessary utilities shut off or you can't put food on the table then rolling in the credit card debt may be the only choice you have.
But if you're only reason for refinancing to reduce monthly expenses is to feel better about your financial situation, you need to reconsider.
It sounds good to “save” $1000 a month on debt payment but you haven't decreased your debt load, you've increased your long-term interest payments and you've increased the time it will take to pay off the debts (both the mortgage and the credit cards).
And what about the $1,000 a month you're saving? What is your plan with that money?
There is no sure-fire way to end up in more debt or with a worse financial picture than not having a plan for your spending. Without a solid solution to pay down debt, reduce monthly expenses, and track spending no interest rate, monthly savings, or refinance is going to help you.
A Better Way
There is a better way to handle your credit card debt besides rolling it into a mortgage.
A solid budget with a debt reduction plan built into it will help you eliminate debt over time (there are no quick fixes, sorry) and establish funds for future purchases.
No matter if you did incur debt overnight, you won't get out of it overnight. It will take hard work, sacrifice, and planning. You must be intentional. And, no quick monthly decrease in expenses will make a long-term difference in your finances without a solid monthly budget.
Before you consider rolling your credit cards into your mortgage, take a long look at your overall financial situation and come commit to building a budget and working on financial goals.