Refi/Cash-out to pay off debt? Am I doing the right thing?

[Anonymous]

Hi! I've seen a lot of good advice come up on this message board, and figured I'd be remiss if I went ahead and did anything rash without putting my situation out there. Here goes...

I'm a 26 year old single male with a secure civil service job with decent pay.

Two years ago, I purchased a 1 bedroom co-op for $175,000. Thanks to a down-payment assistance grant, my mortgage currently sits at $151,000 principal at 5.875%, 30-year fixed.

Apartment was a fixer-upper, so I fixed it up, and I'd put it on par with other 1-BRs in the building; the last one was sold for around $210,000. Conservatively, I'll say that my apartment could be appraised at $190K.

I have about $11K in credit card debt...balance transfer shuffling has put most of that on one card, but the 2.9% promo rate is about to mature to a nasty 18.99%.

Do you think it's time to refinance? What's the best way to get cash out of my equity so that I can pay off that debt once and for all? Refi, equity loan? I only intend to stay in this ap't for another 5,6 years at the most...

Credit scores range between 725 and 745. I'd appreciate any opinions or wisdom you guys might be able to impart. Thanks in advance! 

[DallasLoanGuy]

Was your grant a forgivable loan?

 Was a second lien filed?

[Anonymous]

Yes, it's forgiven 5 years after disbursal. As I understand it, the granting agency is listed as a second lienholder.

[Anonymous]

I don't know the details of how you accumilated 11k in cc debt but I can sympathise with you. I just got through paying off a whole bunch of mine by working a second job for going on 8 months now. I would get your income up and work off the 11k instead of taking equity out of the house. Go crazy for 8-10 months and knock it out. Good Luck!

[Anonymous]

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@Anonymous wrote:
I don't know the details of how you accumilated 11k in cc debt but I can sympathise with you. I just got through paying off a whole bunch of mine by working a second job for going on 8 months now. I would get your income up and work off the 11k instead of taking equity out of the house. Go crazy for 8-10 months and knock it out. Good Luck!

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Gotta say ditto to hammer.  I paid off about 29K in cc debt between September 2007 and Feb 2009.  I got a second job in December 2007 and a promotion with a raise at my full-time job in May 2008.  

Additionally, I would guess that if you refinance your home, you're going to have to pay back the down payment assistance.  And I don't think it's a good idea to use your equity to pay down cc debt.  

If you increase your income, paying your debt off will mean more to you in the long run, trust me.

[Anonymous]

You guys think so? I'd love to be able to put my nose to the grindstone, pinch pennies, and wipe away that CC debt. Unfortunately, even under the most austere of austerity plans, that'd be a two or three year proposition... I could theoretically scrape together an extra $300-400 a month, but that would really sting. I'm right outside NYC, living alone...and not exactly swimming in disposable income.

The whole refinancing idea came up as a way to reclaim an extra $100 or so by lowering my rate...cash-out came to mind when I figured I could be paying 4.8% on that 11K of debt vs. 18%. Since I have no intention of staying in a 1BR apartment for more than, say, 4 or 5 years from now, it's not like I'd really ever make a dent in paying off a 30-year note...

[Anonymous]

Do not cash-out refi...Here is why

Putting short term debt into a long term fixed loan backed by your residence is generally a bad idea.  The interest rate may be lower, but you won;t pay it off early.  Also, you are putting all of your eggs into a basket.  What if you ring up more cc debt (you can say you won;t but if you have that much problem paying down this debt in less than 18 months, you are living close enough to the edge financially that there is no way you can predict that down the road....

If you refi, you will have to pay back all or some of the down payment assistance, therefore taking alot of your equity.

If and when you try to sell in 5 years or so, you will basicly be lucky to break even on all the debt you just paid into the loan.  On top of that, there is almost no chance you will have built up enough equity to pay realtors fees and still have down payment money on a new place.  Most local DP programs are 1 time use funds so you are unlikely to be able to re-use the same program down the road.

If you can get a great rate reduction on the original loan, do the refi (no cash out) and pout every extra penny into paying it off.  You should be able to pay it off in no more than 2 years if you really pinch and apply the mortgage savings to the debt.  It may mean some lifestyle changes, but you can do it.

[itsjustmeibe]

 I have about $11K in credit card debt...balance transfer shuffling has put most of that on one card, but the 2.9% promo rate is about to mature to a nasty 18.99%.

If I were you, I would apply for another credit card to transfer the balance. I wouldn't go touching my home equity for that. Do you belong to any credit unions? Also, who is your credit card with? They may be able to give you another promotional rate, or lower the rate. Citibank just did that for me.

[Anonymous]

Thanks to all for your input, but it seems like the matter's moot anyways. Just dug up a "Refinance Disclosure" from my grant agency...states as follows: "Subordination will NOT be granted to cash out for any purpose, this includes paying or consolidating debt." However, simply refinancing for a lower rate is apparently an option.

Not sure what to do now. Situation is as follows:

$151K 30 yr./fixed mortgage at 5.875% (Ap't purchase price was 177K in 2007)

Credit score: TU 738, EQ 721

<$12K Credit card debt (10K on BofA about to mature to 18%, 2K on Chase @ 14%) 

I've got a secure government job, and will be getting a sizeable raise when I reach "top pay" this time next year. I'm just trying to minimize the interest I pay on my debt until then...what's the best way to do that? HELOC? Is there a possibility I can apply for a credit card with a low BT rate that will take on all or most of my debt load? Or is there a third option that I'm unaware of? Also, would it be worth it to refinance? 

[Anonymous]

you probably do not have enough equity to do a cash out in any case.  You may have enough for a refi depending upon how much prices have dropped in your area, but remember that sine 07 prices have dropped at least 20% in most areas.  Where I live they are down 40% since then and even more since the height in 2006.

As far as best options.  Personally I would refrain from opening any more lines.  If you are living close enough to the edge that you can not pay off the exisiting cards in a realtively short time (12-18 months) then the last thing you need is more credit because the temptation to use it will still be there.  Work to pay balances as low as you can and then when you get your raise, make it a priority to get this taken care of.  You will be much happier when it is paid.  If you can get a low interest card from somebody then go for it if you fell you can keep from ringing up more debt, but historically, this is rarely the case.  People who can not pay their cc balances down relatively quickly historically add more debt over time when they do what you are proposing.  the other option is to call your currnet cc and tell them you are going to transfer the debt to another cc with a low interest rate and see if they will give you a rate break.  You don;t have to really apply for another card, just tell them you plan to.  Sometimes they will do that...Other times they may not.  If they say no though, it could trigger an underwriting review/limit decrease/etc.