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To refinance, or not refinance? Let’s look at the numbers

By Jonathan Weaver
MVI Housing Counselor

In the past few months, I’ve been hearing more and more ads on the radio urging people to refinance their homes and use their equity to pay off credit card debt.

This all sounds strangely similar to what we heard in the early 2000s.

On the surface, it sounds like a good deal, but I want you to dig deeper. Let’s look real quick at the number side. Assume you have $20,000 in credit card debt at 18 percent interest.

If you buckle down and pay off the $20,000 over five years, you would need to pay $507 per month. It’s not fun. It’s tough — hard to do.

So when they say you can refinance your debt for 3 percent, it sounds pretty great.  If you refinance that $20,000 in debt at 3 percent over 30 years, you could pay off your $20,000 for $84 per month.

Wow! You just saved $423 per month! Think of what you can do with that extra money.

But here’s the real math:

$507 x 60 payments = $30,432
$84 x 360 payments = $30,335

Wait … it’s the same?

It gets worse. Most people find out that after they pay off their $20,000 in credit card debt using the home refinancing method, within 12 to 18 months, they’ll have another $20,000 in new credit card debt — plus they now owe another $19,374 on their mortgage loan!

In other words: Using the equity in your home to refinance credit card debt can leave you worse off than when you started.

We all know that sometimes, it seems like you’re working hard and barely scratching the surface of your debt. But with the right financial plan, you can pay off your debts and feel proud of your accomplishment.

And once you pay off your debt, remember, you don’t want to get back in the same position again. You don’t want to wind up worrying about how much you owe and wondering how you’re going to pay it.

Remember the housing crisis in 2008? Part of the reason for that crisis was that no one had equity in their homes.

We leveraged every dime out of our homes, and when the values dropped, we were “underwater” — we owed more on our houses than they were worth. People started to bail out of the loans and walk away.

Having equity in our homes is a good thing, and so is paying off debt.

If you want to work on a plan to pay off your debt and set yourself up for a better future, call us at 412-464-4000 or 724-565-8040, or email us at dmattie@monvalleyinitiative.com, and ask to speak to one of our employment and financial coaches. We can help you do better than taking equity out of your home.

Mon Valley Initiative