Debt Con Goes DEFCON
Back in the Cold War era, the Joint Chiefs of Staff implemented a new system to indicate military readiness and they called it the 'defense readiness condition,' or DEFCON. They gave it five levels, "1" being imminent nuclear war. So let's use this model --- along with some crafty adaptations --- to demonstrate how debt consolidation refinances can also reach critical levels as a consumer manages his finances along with the value of the his home. It's important to remember that managing your mortgage and other debts always requires vigilance, just like military preparedness. With a nod to our friends in command, let's examine the steps on our own DEBTCON scale:
- DEBTCON 5: In "peacetime" our borrower can go about his merry way, carry some manageable consumer debt, keep his existing mortgage and only consider a refinance when interest rates drop and the market merits.
- DEBTCON 4: Here, our borrower might work to get ahead of a pending change. We see this frequently. Perhaps, like at the time of this writing, a borrower is 3 years into a 7/1 ARM but sees rates rising and wants to fix something in before it's too late. This borrower doesn't have to act, but by doing so, he assures that risks that may be far from materializing are contained.
- DEBTCON 3: This consumer recognizes that refinancing and consolidating other debts, even if at a rate that is the same or slightly higher than he currently holds, is a better strategy than continuing to pay higher consumer rates (credit cards, student loans, auto payments, etc.). Successful implementation of the strategy saves money each month, may impart tax benefit to the remaining debt and, with responsible spending going forward, allow all of the obligations to be extinguished far sooner.
- DEBTCON 2: Sleep is being lost, minimum payments are being made on credit cards but there is still a sliver of equity in the home to enable a cash-out refinance to work. Consolidating the credit card and consumer debt is, at this point, necessary to make the household budget work --- let alone the fact that the high balance-to-limit ratio is eroding the FICO score with each billing cycle. Borrowers at this level might be forced to accept something other than a fixed rate mortgage and they may have terms that are less than the best but at DEBTCON 2, 'wants' become secondary to 'needs' and a refinance is a lifeline.
- DEBTCON 1: There may no longer be sufficient equity in the home to consolidate or the borrower may not qualify. The borrower faces tough, tough choices and his credit score might get nuked in the process. A refinance funded at this level, if still possible at all, goes before the grace of God.
In the mortgage business, we prefer to see our clients operate between levels five and three. But likewise, we realize that, to quote John Lennon, "life is what happens while you're busy making plans for other things," and that financial fortunes can change and shift, sometimes beyond our control. When they do, understanding how a cash out refinance can be used to consolidate your other debts is a great piece of knowledge to have and use. We're here to help you make sense of the pros, cons, math and logic of any refi so call on us before you scramble the jets.
Robert J. Spinosa
Vice President of Mortgage Lending
Marin Office: 324 Sir Francis Drake Blvd., San Anselmo, CA 94960
Berkeley Office: 1400 Shattuck Ave., Suite 1, Berkeley, CA 94709
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