Assuming about $45K in debt in about 10 or so different accounts (credit cards, furniture, yada yada). Rates vary from 5.99% to 12% APR $260K home w/ $196K first mortgage and $49K second @ 9.3%. First is conventional 30Y fixed, second is 15Y amortized over 30Y (bal due or refi at 15Y mark). Would it be prudent to refi the second mortgage with a 125% LTV 25Y second mortgage (to get $45K out to pay off the other 10 accounts) and then just have one payment? It would be a higher rate (12% ?) or just pay on the cards as is? (credit is excellent, but anytime you go over 100% LTV the rates go higher). Actually, we'd only be looking at about 113% LTV, as there's no need to take out the full 125%. And the new second would be amortized over 25Y and paid off, whereas the current second is amortized over 25Y but due @ 15Y (essentially, we're just paying interest until 15Y unless we make add'l payments during the 15Y timeframe). Any interest up to 100% of the value of the home is tax deductible, which means the higher interest rate will be somewhat compensated for, but to what extent, I don't know. Any advice would be appreciated.
I wouldn't advise it as you are taking unsecured debt and making it secured (your home). I'd hate for something to happen and you lose your job and then your home as you can't pay the 2nd mortgage. At least if you can't pay the CC's you won't lose your home which is probably your biggest asset.
We have been working with real estate in some form or fashion for quite some time now and I would personally recommend that you use extreme caution when mortgaging a home even at 100%. For no other reason than: do you really want to risk your home? I would be very sure that you are way more than capable of paying the payments at the level they would be at. What if you lost your job? The bottom line is that a lot of people expect the market to tank again. Would you have the cash to pay it down if you had to sell it for 80% of it's current value? I see a lot of people over mortgage their homes, now when the market is pretty good, only to not be able to sell them for what they need when times get tough and go into foreclosure. Foreclosures are at an all time high and I would hate to see anyone go through that mess. If you have any other way to whittle down your bills I would strongly advise that route.
Brutal honesty: You're in serious financial trouble, but you obviously haven't faced up to it yet. You're trying to live beyond your means, and you're financing it by trading your home for quick cash. Stop what you're doing and think about this: What's going to happen when you can no longer borrow money from your home to pay your bills? Are you REALLY going to cut up those credit cards after you pay them off with the value from your home? Or, are you going to run them up again, trying to live beyond your means? Stop the cycle now, and get yourself to a bankruptcy attorney or credit counselor.
Re: Re: 125% LTV 2nd: Good idea or bad? Stellar reply. I'm sure you think it's a good idea to trade unsecured debt for secured debt. I'm also sure you think it's perfectly acceptable to fully mortgage a home to live beyond your means. Regardless of what the media tells you, it IS NOT a good idea to use your home as a financial leverage instrument. "Newbie?" You've already been down the path to bankruptcy. I would think that you would want to save someone else that pain, rather than standing by and watching them go through it too.
I actually think it's a bad idea to have a home mortgaged at over 80% LTV. More than that and you don't have enough equity in the house to get out of it if you need to. The day I caught myself filling out forms to borrow more than 100% LTV in order to pay off unsecured creditors was the day I walked into a BK attorney's office and told him I needed to file. Why have you spent $45K more than you earned? Have you corrected this spending pattern? If not, you're just delaying an inevitable reckoning and making it a lot more painful when it happens.
Too much.... I don't disagree with your thought process. I do, however, disagree with your attitude in general toward people. You make assumptions that people live beyond their means, assumptions about what people watch on TV, etc. Stop editorializing everything you respond with and give just the facts. Nobody is interested in your personal thoughts - they are interested in your knowledge of credit issues.
Re: Re: 125% LTV 2nd: Good idea or bad? Mr. TMitchell - Unfortunately for Mr. Too Much, you have proven your point. He took the liberty to tell me that I was "living beyond my means" and that I should consult a bankruptcy attorney, while not reading the post for what it was asking and for assuming that he knew my entire background and financial scenario himself. $45K on various accounts is NOT beyond MY means, Too Much. Much of it was the result of a nasty divorce that forced me to fork out tens of thousands of dollars for attorneys and for/during the settlement process. The other part is/are/were expenses for furnishing a new home, since the ex-wife pretty much walked away with everything that was not nailed down (had to buy all new appliances, riding lawn mowers, a new lawn, an irrigation system, a few toys, all furniture, etc.). Annual household income is (and has been) > $130,000 per year. I bring home more in a month than what many on this board have filed BK for OWING in the first place. In a nutshell, instead of spending myself broke and having NOTHING in the bank, I had to shell out a bunch of $ for the divorce and then I had to turn around and, basically, furnish an entire new house. For example, several thousand in furniture (originally $4K, paid down to $2K using 0% financing for 18 months). Some of the offers expired, and I moved the balances around to other 0% offers (6 months, 1 year). Basically, it makes NO sense to me to buy something using MY money when someone else is going to let me use THEIR money -- FREE of charge -- for a year or 18 months. Down to my point: My question was that of potential savings (tax deductible interest) vs. the higher rate for the refinanced 2nd mortgage. I'm not a tax guy, which is why I was posing the question. Too much, the next time I need someone to tell me that I'm irresponsible and need to contact a bankruptcy attorney or a consumer credit counseling service, I'll go to my 32' Regal Commodore Sport Cruiser (that's a boat, BTW), open the fridge, grab a beer, sit down @ the table next to the automatic ice maker, adjust the central air conditioning and THEN ask for a stupid comment.
Re: Re: Re: 125% LTV 2nd: Good idea or bad? The irony here is that you don't think that you're bankrupt, assuming the numbers you provided. $45k in unsecured debt, $130k in income, 2 mortgages that exceed the quick-sale value of your home. Sorry my friend, you're bankrupt., You just haven't admitted it yet. However, if spiraling down the drain and getting a 125% loan-shark deal will make you feel better, so be it. At least you'll know where to come when it's time to seek bankruptcy filing advice. If you want good advice: Stop trying to shuffle balances, paying banks most of your salary in interest payments, and *living beyond your means. Cut up the cards, stop trying to over-leverage your home, and get yourself into a credit counseling office ASAP. * Note: "Living beyond your means" has nothing to do with WHAT the money is spent on. Who cares if it was on a divorce. It's still more money than you make. Also, I've never seen an 'irrigation system" or furniture that was a necessity. Trying to keep up with the Jones' is expensive, huh? The longer you deny that, the more pain you'll eventually suffer. P.S. I really like the bravado that you express here: "Annual household income is (and has been) > $130,000 per year. I bring home more in a month than what many on this board have filed BK for OWING in the first place." I think that pretty much sums it up. When you get ready to sign for that 113% mortgage (shudder), be sure not to look at the interest rate, or total payments. No use spoiling the denial.
Re: Re: Re: 125% LTV 2nd: Good idea or bad? Don't worry John, it's real easy to be brave while hiding behind the cloak of anonymity. You'll get those who are real "tough-guys" when nobody knows who they are. I wonder if TOO MUCH (ain't that right), would be so obnoxious when confronted face-to-face.
Re: Re: Re: Re: 125% LTV 2nd: Good idea or bad? Funny that you cannot address my points, and instead are forced to attack me personally. In case you hadn't noticed, I was trying to help the original poster realize that they have a spending and debt problem. Sugar-coating the situation doesn't make it better. When you owe more than your home is worth, you're in a worse position than most renters. Heck, when you have a 100%+ mortgage, not only don't you own your home, but you become a renter who has to maintain and reapir, as well as pay taxes and insurance on their rental unit. Who in their right mind would do this? Oh, I forgot about the tax advantages.... oh my.
How can you possibly know someone has a spending problem by reading a single paragraph??? Are you kidding??? You've got to be kidding. The poster didn't ask whether he had a spending problem or not - he asked about a particular situation.
Re: Re: 125% LTV 2nd: Good idea or bad? He is trying to get a 125% mortgage. He has $45k in unsecured debt, on top of already taking out a $49k second mortgage on his home. Where's the savings account? The retirement account? The equity in the home? No one does those things if they have control of their finances. It's a classic case of trying to borrow your way out of debt.
Re: Re: Re: 125% LTV 2nd: Good idea or bad? I believe you already said that....several times. George likes to live in a world that is free from reality.
Re: Re: Re: 125% LTV 2nd: Good idea or bad? Current situation: Current average interest rate on CC debt: 10% Total CC debt: $45000 Total interest/yr = $4500 Current average interest rate on 2nd: 9.3% Total 2nd debt: $49000 Total interest/yr = $4547 Assumed marginal tax rate: 40% Actual after tax cost = $2348 Total cost = $6848 Assuming that CC interest doesn't go up, and that the 2nd is a fixed rate mortgage. Alternative situation: Total 2nd debt: $97000 (you implied $3000 costs) Average interest rate: 12% Total interest = $11640 Actual after tax cost = $11640 - ($60000 * .12 * .6) which equals = $7340 So it's worse. You pay more interest on the $45000, you pay more interest on the CCs, you can only deduct part of the interest. In ADDITION, it has the disadvantage of securitizing your debt. In ADDITION, as you pay off CCs, the average interest rate goes down; not true for the 2nd. In ADDITION, it leaves you with no equity in the house, so should you need or want to move, you won't be able to: Value of house = $260000 Cost of sales/moving = at least $26000 Total debt = $293000 You would have to cough up at least $59000 cash if you wanted to sell the house. Do you have $59000 in cash lying around? If so, why aren't you paying off the credit cards? If you couldn't cough up $59000 cash, the lienholders wouldn't let you sell. Trust me, it sucks to be trapped in a house you can't afford to sell.
