Refi mortgage & ditch the credit cards: which comes first?

[Working Mama]

Dearest Mustachians,

Woe!  A conundrum has a working mama struggling with a major decision.  What pray is troubling Mama, you ask?

Well Hubster has a pile of school loans: six figures and then some.  Credit cards were a fall back after job loss and the usual unaffordable baubbles that continue to make no sense, as they did the moment the bill was charged.  Alas, no sense in crying over spent (or pissed away) money.  The only thing to do is change our ways – which has happened, albeit there’s plenty more change to come.

The mountain of debt on the CCs is just north of $35K. Hubby’s school loans are… well it makes me cry to name the number, many times his salary.

My question for you dear Mustachians is:

Should I refiance the mortgage and save a pile (interest) in the long run or suck it all up and pay off the  banksters at the CC companies, that are still too big to fail?

I can pay off my CC bills that are in the range of $5300 but hubby’s CC make up the remainder.  We have one bank account.

I can refi the house and continue to pay the same amount monthly at a lower interest rate – and it would mean his name comes off the deed.  Love him dearly, but no working mama in any right mind would sign a mortgage (alone) and keep the hubby on the deed.  And it would protect me and the kiddo from the most horrible and unconsciounable thing if anything might happen to him before the Sallies (at Sallie Mae) finishing schupting him for bad choices. 

(And yes before someone prattles on about bad choices I am very clear on it all now.  You are too late – I have my hair shirt on as I type.)

In a nutshell here is the question:

Pay off my CC and refi the house at a lower interest rate and pay the same monthly mortgage payment? (The credit union does not want to refiance me with the CC debt)
 or
Transfer some of hubby’s cc bills to my name (at 0%) and pay them off?

Much love for your time and wisdom,
Mama

PS If I left anything out – well the hair shirt is distracting and it itches.
http://www.merriam-webster.com/dictionary/hair%20shirt

[SwordGuy]

Congrats on starting on a better path!  It will be rough and take several years, but within the year things will be noticeably better.

First of all, you seem to be under the impression that your husband has debts and that you have different debts.  Depending on which state you live in, that may not be true.  You may already be legally on the hook for his debts and vice-versa.  If it makes a difference to your plans - i.e., working mama might become single working mama, you might want to look into that.

Her money/my money isn't how I think about my family's assets and debts, so apologies ahead of time if I've read more into your comments than you meant.  It's just our money and our debts in our home.   Unless we had had some really bad luck and/or I had really irresponsibly mucked up the family finances; and the only way to repair it was to take my name off the house deed in order to protect my family, I would assume my wife no longer loved me and act accordingly if she suggested such an action.  Your mileage may vary.

If you want the best advice on which path to take, you'll need to post the following info:

For each debt, the amount of the debt, the monthly payment, and the interest rate, and what kind of debt (school loan, 1st/2nd mortgage, CC, auto, etc.

If you post your take home pay and monthly expenses by category, you'll probably get a better ideas there, too, for how to pay down the debt faster.

You listed two choices, but there are many more.

Refi the house at a lower rate and lower monthly payment to free up money to pay off higher interest debt.
Home-equity loan at lower rate to pay off higher interest debt.

Don't actually understand why your two choices are considered an either/or situation.  Can't you do both?

[Working Mama]

Dearest Sword Guy,

You are indeed a gentleman - thank you for the prompt reply.

Oh dear!  Not the impression I hoped to create. Hubster is a tremendous man.  He worked hard though school for eight years to earn a master’s degree in engineering.  While I think we are happily married – both of us come from families with several failures and where one or the other got quite the short end of the marriage and the shabby remains of the household funds.  So while our marriage has been wonderful one can never assume past behavior will be the same as future behavior.  He has lots in his head and I have forgone much to support him while in school, and now there is lots to pay off, and there is no assurance that he will not find some older ;) woman he adores and leaves me! Crazy I know – but I have seen it done!

As for doing both –(refi and CC and loans) the bank said his debt load is too high for him to be on the mortgage and the interest rate would be correspondingly adjusted (increased) to take that into account.

Detail on expenses: Well posting that whole bit of detail does have me a tad nervous.  I can understand how it will help but also worries me – I know a bit paranoid... but alas I do live in the woods surrounded by lovely hippies and preppers.  We can’t help but fear big brother here.  And it will take smidge of time & effort and I have a loaf of bread to bake.

Once again thank you for the thoughtful reply.  You are indeed kind.

Love, Mama

[Paul der Krake]

Hey Working Mama,

It's good to hear you are taking energic steps towards your debt- you sound determined and resourceful.

Now if you are not going to share the numbers, the spreadsheet wizards of this forum can only give you general advice. Which is completely fine, mind you, not pointing the finger here.

The high interest CCs: yup, they are bleeding you dry. Judging from you post I take it you are in your late twenties/early thirties, with a kid who is probably not willing to eat nothing but cold beans for the next 6 months. But damn sister, assuming a conservative 13% APR on your 35k CC debt, what you pay in interest every month is more than I (single, early twenties) spend monthly on groceries + internet + car operation (includes gas, insurance, maintenance).

Unless your housing market is guaranteed to go waaaaaay up in the coming months, hold the refi and pay those bloodsuckers off. If you have savings, even with some low interest, put them to use immediately and enjoy your <insert_CC_APR> % return on your money.

Correct me if I'm wrong, but it sounds like you are saying the sacrifices of 8 years of supporting your husband through school haven't quite paid off in terms of income. Does he have other employment options? What about you?

But don't take my word for it. Fire up a spreadsheet, and run the numbers. If you are not scientifically inclined, have your husband's 8 years of engineering school put to good use. Hint: pay off the high interest stuff off first. You will find that Mustachians find great pleasure in playing the system and finding unexpected sources of income/savings virtually every day. When you run the scenarios, go wild. Experiment with 'radical' solutions, like renting out a room of your house to a friend or local student, selling things, etc. The answer might be just around the corner. And then let us know! This forum is filled with stories of people who dug themselves in a hole in a previous life and overcame their shabby finances. You are not alone.

Best of luck to you,

Paul

[TomTX]

Yep, numbers would definitely help. We're not talking about paying off $35k in debt,just your $5300 (or less! see below.)

$500k mortgage going from 8% to 3% versus paying off $2500 in credit cards at 12% will give a vastly different answer than

$80k mortgage going from 5% to 4.25% versus paying off $5300 in credit cards at 33%.

Note the smaller number for paying off credit cards in the top example? We need to compare the actual closing costs against paying of the same amount in credit card debt. Any leftover cash after a refi can still go to paying down credit cards.

If your refi closing costs are $5300, you are most likely being offered a complete ripoff for a refi. That is WAY high on closing costs.

Have you gotten at least 3 different "Good Faith Estimate" papers from different lenders? At least one should be a local credit union, and at least one should be via a big online aggregator (Bankrate.com, or Quicken.) Credit unions are often much better than banks, but the online method lets you search a LOT of lenders.

[Karl]

Working Mama,

I can only reinforce what others have already said.

1.  Shop around for different mortgage refinancing options.

2.  Pay off the highest interest rate debts, presumably CCs, first.


However, I have one suggestions and one question about the educational loans.

Suggestion: put the education loans, for now, on income-based repayments if you have not already done so.  This will, most likely, increase the amount that you pay over time.  On the other hand, the decrease in currently family stress could prove priceless in terms of maintaining a happy marriage over time.

Question: did you co-sing for any of your husband's loans?  If not, and something happens to him, I believe that you will be off the hook (based on our past educational loans).  If you two have co-mingled your loans by having them refinanced together into one loan, this option disappears.  I would strongly suggest reading, in detail, the legal details on the loan notes.  For my student loans, my loans would have disappeared if I died or became completely disabled.  I hope you will find that this also applies to your family loans and, as a result, remove this concern from your life.

Karl

[SwordGuy]

I'm very happy to hear that about your hubby!  :)

You've got two basic ways to pay off debt:

1) Highest Interest First
2) Smallest Debt First.

Option 1 pays off the debt the fastest.
Option 2 gives you better cash flow, i.e., less stress in paying the bills, first.

If squeezing out enough money to cover the bills is a monthly nightmare, option 2 is better.  Once it's easier to pay off the bills, you can switch to option 1.    In most of the scenarios I've run across over the years, it's only made less than 3 months difference over a multi-year time frame, so I'm generally a fan of option 2 to maximize stress-free living.

And, of course, you can look for extra income to throw at that debt.   Sell off stuff you don't really need or rarely use (and could borrow when you do).   This forum has lots of ideas on how to cut costs and sell off unnecessary items.   An extra job for a set period of time is also a great way to raise money to cut down some of those debts faster.

[Working Mama]

Dearest Sword guy, Tom TX, Paul, & Karl
Thank you for your comments

Indeed one can see that transparency in numbers will move the discussion productively forward.

Ah to be in mid thirties…. We are in our early forties with no retirement savings or any other savings.

Monthly income starting in October $7500 (hubster’s new job makes a difference.)

Cars are old and paid for.  Auto insurance is the minimum for cars in the mustachian style. Not sure of the amount right now. However, we are about to plunk down $450 this month for replacement of the oil seal in my dear little car.

Health insurance $? But it is removed from the take home pay mentioned above.
Phone: one is one prepaid cell $35 and the other is provided by hubby’s company – FREE!
No land lines and internet comes in at $50 a month
Heating Oil (on a budget plan for cheaper rate - $184 a month) although we heat with mostly wood, from our land.
Electricity is $70 a month
Food – groceries are $550- $600 a month for three.  Have a little boy who loves Working Mama’s cooking.  Since no one asked: the bread came out great!
Gas $400 – we drive a lot.  Our state, in the Northeast, is rural and means work is going to be far from cheap housing.  Jobs are not plentiful enough to pick up and move.
Life & home insurance $? 100?
Son’s school fees $835
Housing $1140 (mortgage)
School loan payments $1200 (minimum payment)
CC-  at the minimum rate – which is too low) totals $1200
Hubster built the house – it is gorgeous, comfortable, well done and efficient.  Good man!

Hubster’s school loans are $67,000 feds (which disappear on death) and $120,000 private (aka Sallie Mae). I co-signed one tranche of $20K.  I should not be on the hook for anything except what I co-signed.  However Sallie Mae can take half the house because hubster’s name is on the deed.

Credit cards – in my name $5300
Hubster’s CC come in at $30,000
Our average interest rate is 15.53%.  I have one zero percent card with $2,000 on it.
And another card with 8.99% $3,300.

Mortgage is $185,000 forty (40!) years at 4.25% monthly is $1140 which includes taxes and all other items required.

I can get a mortgage at $185000 2.8-3% for 20 years.  Banker said if hubby goes on the mortgage with his debt load they probably won’t give it to us or the rate will be so high that it doesn’t make sense to change.  For me to get the mortgage, which is possible based on my own income, I must NOT have the credit card debt to fully qualify for that low interest rate.

Or I can transfer the balance highest interest credit card of hubster’s to my name for 18 months and not pay the banksters any more than I need to.
 
So do I risk focusing on the CC and eliminate them and maybe pass up an opportunity to have a lower interest rate on our mortgage, which will mean a lot less actual cost? Total savings over the life of the mortgage is $100,000.

Love, W. Mama

[TomTX]

Mama,

After the holidays, please get a Good Faith Estimate on that loan from the bank, plus a couple more.

Sounds like a low rate, but we need to know the closing costs on the loan, too. A Good Faith Estimate is a semi-standardized way of putting all the numbers together so that you can actually do an apples-to-apples* comparison between loans. High up-front fees can be used to 'buy' a low rate. A higher interest rate can often 'buy' lower fees. Sometimes fees are just there as extra bank profit.

*There's some wiggle room for the lenders, so you may be comparing Fuji apples against Red Delicious, but it's better than comparing  a Fuji and a spark plug.

[Another Reader]

It is common here in California to refinance by taking the spouse with the unacceptable credit off title just long enough to close the loan in the other spouse's name.  Once the loan closes and a respectable 30-60 days pass, the spouse that took out the loan can add the other back.  California is a community property state if that matters.  However, a 20 year, 3 percent loan of $185k has payments of $1,026, a monthly payment reduction of only $114.  Not sure this is where I would focus if I were in your shoes.

Why is your son incurring school fees?  What's wrong with the local public school?  That's a huge chunk of your budget.  My conclusion would be I could not afford this right now.  You also have a huge amount of unsecured debt for your income.  How come we don't see you "running around like your hair is on fire?"  In your shoes, I would cut everything to the bone to get rid of that debt.  If you and your husband are working together on this, I'd pool everything to get rid of those credit cards a la Dave Ramsey.  Then I would hit the student loans. 

Once I cut my budget and got the credit cards to zero, that $1,140 mortgage wouldn't be so bothersome to me.  If I could refi, great, if not I can afford the house anyway.  The momentum you will have developed by then will help you plow through the student loans.

Try putting more options on the table, at least to look at the costs and benefits.  There is too much to accomplish here without major changes in my view.

[mm1970]

It is common here in California to refinance by taking the spouse with the unacceptable credit off title just long enough to close the loan in the other spouse's name.  Once the loan closes and a respectable 30-60 days pass, the spouse that took out the loan can add the other back.  California is a community property state if that matters.  However, a 20 year, 3 percent loan of $185k has payments of $1,026, a monthly payment reduction of only $114.  Not sure this is where I would focus if I were in your shoes.

Why is your son incurring school fees?  What's wrong with the local public school?  That's a huge chunk of your budget.  My conclusion would be I could not afford this right now.  You also have a huge amount of unsecured debt for your income.  How come we don't see you "running around like your hair is on fire?"  In your shoes, I would cut everything to the bone to get rid of that debt.  If you and your husband are working together on this, I'd pool everything to get rid of those credit cards a la Dave Ramsey.  Then I would hit the student loans. 

Once I cut my budget and got the credit cards to zero, that $1,140 mortgage wouldn't be so bothersome to me.  If I could refi, great, if not I can afford the house anyway.  The momentum you will have developed by then will help you plow through the student loans.

Try putting more options on the table, at least to look at the costs and benefits.  There is too much to accomplish here without major changes in my view.

My guess is that her son is of preschool age...

[Working Mama]

Excellent thoughts - all huge thanks!

I transferred $3K onto a CC in my name with zero % interest for 18 months.  I'll be looking around for more 0% cards. The plan is to payoff the CCs in 18 months and in Q1 2013 look at a refi of the mortgage- keeping the monthly payment amount the same but paying IN THE LONG RUN less interest to the bank.  The spreadsheet worked!

Thanks for the tremendous advice.

Love, Mama

[jnik]

I transferred $3K onto a CC in my name with zero % interest for 18 months.  I'll be looking around for more 0% cards. The plan is to payoff the CCs in 18 months and in Q1 2013 look at a refi of the mortgage

Remember that opening and closing accounts can cause a hit to your credit score, so if you're planning on shifting around a lot of credit cards it may affect your refi.

[Working Mama]

Jnik
Thanks for the advice. Excellent point!
Love, mama