Solution to Debt Consolidation May NOT Be to Refinance

Yes... I AM in the business to help borrowers obtain mortgages. Once again, I have talked myself right out of a transaction. This isn't the first time, nor will it be the last. Why, you might ask? Because, although I AM in the mortgage business, more importantly, I am a Mortgage Consultant. My job is to listen to a borrower's circumstances, ask pointed questions, and make my recommendations according to individuals needs, wants and goals. Sometimes, that recommendation is "don't do it". Sometimes, there may be several variables at play leading to several possible options. It can be like working through a maze.

Here is a recent "back to basics" response I had for a repeat client considering refinancing:

"Refinancing with only a .375% improvement in interest rate will take a long time for you to reap the benefits. It would hinge on how long you stay in your home. Unless you are going to save about 1% on your interest rate, knowing your circumstances, I don't think I would do it. (going from 6.25% 30 yr fixed to 5.875% 20 yr fixed) 

The taking cash out to consolidate other bills can be a vicious trap - one many of the people facing foreclosure right now have realized because they did not change their spending habits when they rolled their debt in to their mortgages. If you can, to keep peace in the house since (spouse) does not wish to draw cash out to consolidate, maybe you can transfer credit card balances to a zero balance card for at least a year (Citi and Capital One both offer one, I believe - there will probably be many deals like this available after Christmas shopping season is done), then divide the balance on the zero interest by the number of months this lasts and try to pay them off completely during that time. If the payments are too high, at the very least, take the savings you have from what you were previously paying toward the credit cards and pay the balance off faster at the zero interest rate.  

For the first 2-3 months your credit scores may sink, since it sometimes takes a while for the paid off account(s) to zero out yet the new account pops up right away. The scores go up later, though, because of the lower debt load. Also, watch for any "one time fees" to transfer, and do not use the new account to charge additional purchases even if you think you will pay those new balances off when the statement comes in, as those purchases will be subject to the regular interest rate and all your payments will be applied to the zero interest balance first while interest accrues on the new charges. Keep your balances less than 60% of your limits on all revolving credit card accounts.  

Once you get the credit card debt paid off, you focus on car loans, then lastly, your mortgage. When the credit card debt is paid off, you should take a look at how many accounts you have and what their terms are and start closing those other than the 5 best accounts. Too much available credit may be hurting your scores.  A simple formula to use to come up with the ideal scores would be the "5-5-5 rule" we have talked about before - 5 accounts that have been open for five years or longer with original balances/limits of $5,000 or more. Mortgage, car loan(s), plus 2-3 credit cards is all you need. If you have cut down your annual miles driven since relocating, keep your vehicles on auto loans vs. leases, and plan to hold on to them for at least 2 years after the loans are paid off, so you'll only want to finance them for up to 4 years."

For this client's individual circumstances, this was the recommendation. It is not always the same. Sometimes, it DOES make sense to refinance to consolidate bills. My recommendations vary accordingly.

A percentage of the foreclosures we are seeing in the news today are a direct result of homeowners who tapped in to their equity, borrowing against their homes to consolidate revolving debt accruing from purchases they made that were not in their budget. Maybe they didn't even HAVE a budget. Don't get me wrong, there ARE times when consolidating debt in to your mortgage CAN make sense. But, not every time. The homeowners who sit down and figure out their household budget and adjust their spending patterns to stay within this budget will enjoy the joys of homeownership, one day owning their home outright after paying their mortgage in full. Isn't that what it is all about for most homeowners?

The lending industry is facing serious upheaval, and is getting back to basics. As with many market swings, the pendulum is going between extraordinarily lax underwriting criteria swinging toward dangerous overcorrection such as H.R. Bill 3915. It's still up in the air, but eventually the pendulum will find its center of gravity. In the meantime, simple common sense is often the solution.

Over the 24+ years I have been in this industry, I've worked with homeowners on all types of transactions, from the First Time Home Buyer who has always held a special place with me to the successful investor accumulating equity wealth for their retirement years, with many variations in between and through many market cycles. I was in Santa Clarita when the Northridge Earthquake struck the Los Angeles Area in 1994, bringing with it not only amazing devastation, but a turning point to a real estate market in a down turn. It triggered the bottom of the market cycle for that area, and created buying opportunities for those "ready, willing, and able buyers". The market downturn we are seeing today is not quite as easily pinpointed as what I experienced in 1994, and is not as area specific. But, real estate markets ARE local markets. Are YOU ready, willing and able to take advantage of the opportunities presenting themselves in your area?

See you at the closing table!

Karen Cooper - OR/CA Mortgage Consultant - www.Quality4Loans.com