Advise on Debt and Re-financing......Help Please!
Tige Richardson
My wife and I have a serious debt problem. We are refinancing our home in
the hopes of getting rid of this debt and starting over. Here is our
current situation and debt followed by what we are doing about it and some
questions we have at the very end of this post:
Current Debt:
==========
1st Mortgage $116,000 @ 7.25% for 7 years w/ balloon payment at end of 7
years ($795/month)
2nd Mortgage $39,200 @ 9.5% for 20 years ($361/month)
Credit Card #1 $9,000 @ 12.9% ($228/month)
Credit Card #2 $12,000 @ 5.9% ($260/month)
Blazer Loan #1 $17,000 @ 7.75% ($355/month)
Corsica Loan #2 $6,000 @ 11.49% ($167/month)
Total Owed on Home (1st and 2nd): approximately $155,200
Current Home Value (appraised): $186,000
What we are doing about this bad debt situation:
===================================
1. Refinancing our home:
* 1st mortgage would be $160,000 @ 7.5% for 30 years fixed
- $155,200 payoff
- $3,985.00 closing costs consisting of:
Loan Origination Fee $1,600
Appraisal Fee $350
Credit Report $65
Processing Fee $390
Administration Fee $550
Courier Fee $50
Closing or Escrow Fee $150
Title Insurance $500
Endorsements $250
Tax Certificate $20
Recording Fees $60
- $835 Prepaid Items/Reserves
Hazard Insurance Premiums $250
Taxes and Assessment Reserves $585
Total Monthly Payment on 1st: $1320.74 (includes P&I, Insurance,
Taxes)
* 2nd mortgage would be $26,000 @ 10.6% for 20 years fixed
- $24,795 in debt payoffs:
$9,000 payoff to Credit Card #1
$12,000 payoff to Credit Card #2
$3,795 cash back at closing
- $1,205 closing costs consisting of:
Loan Origination Fee $500
Appraisal Fee $0
Credit Report $0
Processing Fee $200
Administration Fee $250
Courier Fee $0
Closing or Escrow Fee $110
Title Insurance $90
Endorsements $0
Tax Certificate $0
Recording Fees $55
Total Monthly Payment on 2nd: $261.33 (includes P&I, Insurance,
Taxes)
2. We are thinking about selling the Blazer. We will be going to just one
car for awhile. This will free up:
$355/month
$70/month insurance
$80/month gas
$30/month service (average)
Total monthly savings $ 535!!!
3. We have gotten rid of all our credit cards and are going to live on a
cash or debit card basis for a LONG time....
4. After paying off the Corsica we plan to attack the 2nd Mortgage with
$1,000/month until it too is paid off!
QUESTIONS:
===========
1. What do our proposed 1st and 2nd mortgage figures look like to you
experts out there? We are working with a local company who acts as a
go-between and finds the best deals out there with lenders. For their
trouble it looks as if they are charging us $2100 for both loans. Is this
correct?
2. How do these loans compare to others that are available? Interest
rates? Fees? Closing Costs? Etc.
3. Given our debt situation are we doing the right thing? I realize we are
pulling out every bit of equity in our home and if the market collapses we
will have more loan than home, but we are just not making ends meet right
now. This appears to be our quickest way out of debt. It is also
advantageous to have the interest on the 1st and especially the 2nd as a tax
deduction...
4. Any advice on what we should do with the leftover $3795.00? Should we
put it towards the Corsica and then refinance that car at a lower interest
rate?
Please advise us on anything that we can do to improve this plan. Or please
give us suggestions as to what to do instead. The only thing I ask is that
you be gentle. My wife and I realize that we have been stupid in the past
and had a spending problem. That is why we are here. We are attempting to
change this before it is too late. Our credit is still very good and we
have been preapproved for the above loans. We pay everything on time, but
there is very little left over and we have no savings to speak of.
We are opening up our personal lives here and asking for your help so please
be kind... =)
Thanks very much for any advise or assistance!
Tige and Erin
---
***Please remove _NOSPAM_ from my e-mail address when replying privately***
Bruce
"Tige Richardson" <trichard...@uswest.net> wrote:
>My wife and I have a serious debt problem. We are refinancing our home in
>the hopes of getting rid of this debt and starting over. Here is our
>current situation and debt followed by what we are doing about it and some
>questions we have at the very end of this post:
Debt is relative Tige, we need to know your income to help. If you make
$100,000, this isn't that bad. If you make $45,000, you're drowning.
>Current Debt:
>==========
>1st Mortgage $116,000 @ 7.25% for 7 years w/ balloon payment at end of 7
>years ($795/month)
>2nd Mortgage $39,200 @ 9.5% for 20 years ($361/month)
>Credit Card #1 $9,000 @ 12.9% ($228/month)
>Credit Card #2 $12,000 @ 5.9% ($260/month)
>Blazer Loan #1 $17,000 @ 7.75% ($355/month)
>Corsica Loan #2 $6,000 @ 11.49% ($167/month)
>
>Total Owed on Home (1st and 2nd): approximately $155,200
>Current Home Value (appraised): $186,000
>What we are doing about this bad debt situation:
>===================================
>1. Refinancing our home:
> * 1st mortgage would be $160,000 @ 7.5% for 30 years fixed
> Total Monthly Payment on 1st: $1320.74 (includes P&I, Insurance,
> * 2nd mortgage would be $26,000 @ 10.6% for 20 years fixed
> - $24,795 in debt payoffs:
> $9,000 payoff to Credit Card #1
> $12,000 payoff to Credit Card #2
> $3,795 cash back at closing
> Total Monthly Payment on 2nd: $261.33 (includes P&I, Insurance,
>2. We are thinking about selling the Blazer. We will be going to just one
>car for awhile. This will free up:
> $355/month
> $70/month insurance
> $80/month gas
> $30/month service (average)
>
> Total monthly savings $ 535!!!
>
>3. We have gotten rid of all our credit cards and are going to live on a
>cash or debit card basis for a LONG time....
>
>4. After paying off the Corsica we plan to attack the 2nd Mortgage with
>$1,000/month until it too is paid off!
>QUESTIONS:
>===========
>1. What do our proposed 1st and 2nd mortgage figures look like to you
>experts out there? We are working with a local company who acts as a
>go-between and finds the best deals out there with lenders. For their
>trouble it looks as if they are charging us $2100 for both loans. Is this
>correct?
I'm no expert on this, but I think this is about right. You're paying 1
point origination fee, which is about right for that interest rate today.
The processing fees and administrative fees may be a little out of line.
>2. How do these loans compare to others that are available? Interest
>rates? Fees? Closing Costs? Etc.
Look at www.eloan.com or www.mortgagequotes.com. Eloan gives closing cost
details.
>3. Given our debt situation are we doing the right thing? I realize we are
>pulling out every bit of equity in our home and if the market collapses we
>will have more loan than home, but we are just not making ends meet right
>now. This appears to be our quickest way out of debt. It is also
>advantageous to have the interest on the 1st and especially the 2nd as a tax
>deduction...
It is a very dangerous move for people that can't control themselves. You
can end up getting all the credit card debt back and still have the bigger
home loan. You are then in a worse situation. This happens to MANY MANY
people.
If you have the self-discipline, it is OK. Not only is the interest rate
and monthly payment reduced, it is tax deductible. The problem is, you are
now financing your credit card debt for 20 years. Think how much your
goodies cost you, even at 10.6% tax deductible interest. You are paying
$41,000 in interest on $21,000 credit card charges. That $1200 big screen
TV really cost you $3600! This means you HAVE to pay off the second early,
as you plan to do.
And yes, I did read that you got rid of the credit cards, but if you are
like most of America, you get 2-3 preapproved offers a month. Throw them
AWAY!
>4. Any advice on what we should do with the leftover $3795.00? Should we
>put it towards the Corsica and then refinance that car at a lower interest
>rate?
Stick it in a savings account and LEAVE IT ALONE! It is there for
emergency living expenses if needed. You don't want to get in a zero
savings situation and be forced to consider using a credit card for
something.
If you feel like buying a new video camera or a trip to Cancun, get CASH
not checks, hundred dollar bills, out of savings and pay for it. The
reason I say this is because it will make you appreciate the cost much more
than that piece of plastic. You will consider the purchase and make a
rational decision about whether you really need it or not. Hopefully you
will decide it isn't worth it. The plastic steals this from you. It makes
it easy to spend money. It is the same reason there are chips in Vegas
instead of cash.
Go to www.download.com and search for "debt." There are several good debt
reducing shareware programs out there. You should get one, let it help you
develop a plan to reduce your remaining debt, and follow it. And then
track your progress every month. Get everyone involved in the campaign.
Good luck,
Bruce
Good
lisa...@my-deja.com
I'm a bit confused about the mortgage info but am assuming that your
first set of mortgages doesn't include taxes and insurance and your
second set of mortgage numbers does. I just wasn't clear on how much
you would be saving.
> 2. We are thinking about selling the Blazer. We will be going to
just one
> car for awhile. This will free up:
> $355/month
> $70/month insurance
> $80/month gas
> $30/month service (average)
>
> Total monthly savings $ 535!!!
Really Good Choice here. Even if you find out later that you need two
cars you can always buy a really cheap used car.
> 3. We have gotten rid of all our credit cards and are going to live
on a
> cash or debit card basis for a LONG time....
>
> 4. After paying off the Corsica we plan to attack the 2nd Mortgage
with
> $1,000/month until it too is paid off!
>
<snip>
> 4. Any advice on what we should do with the leftover $3795.00?
Should we
> put it towards the Corsica and then refinance that car at a lower
interest
> rate?
>
Not quite sure why you would want to re-finance a used car. Once it is
paid off it is paid off. Or did you have another need for that money?? I
also honestly didn't know you could re-finance a used car.
Will re-financing allow you to pay off the credit cards at once? If not
then can you move your balance over to a lower interest credit card??
Also, your credit cards have a higher interest rate than your car loan.
To save the maximum amount of money you should put any "extra" money
towards the debt with the highest interest rate.
Good
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Peter Nelson
Tige Richardson wrote in message <6BVj3.1881$xz4.1...@news.uswest.net>...
>Hi,
.. . .
> Credit Card #2 $12,000 @ 5.9% ($260/month)
> * 2nd mortgage would be $26,000 @ 10.6% for 20 years fixed
.. . .
>
>1. What do our proposed 1st and 2nd mortgage figures look like to you
>experts out there?
I'm confused about the whole idea of having first AND second mortgages.
Why not have a slightly larger first mortage and use it to pay down
some of your most expensive consumer debt, and then tighten
your belt and aggressively pay off the rest over a relatively short time
out of income? Especially since you're selling the Blazer.
(you didn't mention what you were getting for selling the Blazer)
The second mortgage is not only at a wicked expensive interest rate,
but it's also 20 years! And it adds to the fees, paperwork, and
complexity
of the problem. And no-one is in a high enough tax bracket that having
a deductible 10.6% loan is cheaper than a nondeductible 5.9% loan.
I'd get a slightly higher 1st mortgage (say $170K) and no second
mortgage. I'd use the extra proceeds from that and the sale of the
Blazer to pay off the most expensive components of your consumer
debt. And then I would aggressively prepay the rest. One way to
ensure that you do aggressively prepay it is to use a credit card
that lets you schedule automatic payments from your bank account
every month. My ATT Universal (Mastercard) Card lets me do that.
[ BTW, when I got the form for automatic payments from them it had
a checkbox for paying the monthly minimum and one for paying a
fixed amount. But I always pay the FULL amount every month
(I just use my card for convenience) and I had to talk to a manager
to find out the procedure for that. When I asked why it's not on
the form they said because they don't like to encourage such things!]
> We are working with a local company who acts as a
>go-between and finds the best deals out there with lenders. For their
>trouble it looks as if they are charging us $2100 for both loans. Is this
>correct?
I don't understand what this $2100 is. Is this in addition
to the usual fees?
>3. Given our debt situation are we doing the right thing? I realize we
are
>pulling out every bit of equity in our home and if the market collapses we
>will have more loan than home,
That's why I don't like going to the full max.
> This appears to be our quickest way out of debt. It is also
>advantageous to have the interest on the 1st and especially the 2nd as a
tax
>deduction...
You'll have to do the math to see if you really come out ahead in
the long run given your assumptions. It's like the old line about capital
gains and losses. Sure you have to pay tax on capital gains, but it
is almost always better to have the gains and have to pay tax than
not have any gains at all. Your total consumer debt is $27,000
after you sell the Blazer. If you took my suggestion and got a
$170K mortgage you'd net $15K out of it which would allow you to
knock your your consumer debt down to $12K even if you netted
0 on the sale of the Blazer. If your income is high enough to even
benefit from the tax advantages of the mortgage interest deduction
then you can probably manage enough cash-flow to pay off that
consumer debt pretty quickly.
Another question: where did you get a credit card (#2) with only
a 5.9% PA interest? Can you roll some of your 12.9% debt into that?
>4. Any advice on what we should do with the leftover $3795.00? Should we
>put it towards the Corsica and then refinance that car at a lower interest
>rate?
Any spare cash should be applied to your highest-(real-)interest debt.
I'm also worried that you are operating with no savings. Any
possibility anyone can take a second job for a little while to
accelerate the pay-down of all this?
---peter
John A. Weeks III
<trichard...@uswest.net> wrote:
> My wife and I have a serious debt problem. We are refinancing our home in
> the hopes of getting rid of this debt and starting over. Here is our
> current situation and debt followed by what we are doing about it and some
> questions we have at the very end of this post:
> QUESTIONS:
> ===========
> 1. What do our proposed 1st and 2nd mortgage figures look like to you
> experts out there? We are working with a local company who acts as a
> go-between and finds the best deals out there with lenders. For their
> trouble it looks as if they are charging us $2100 for both loans. Is this
> correct?
In my opinion, your refinance makes no sense what so ever. You are getting
higher interest rates on each loan, and you are paying both closing costs
and points ($2100) to get there. Keep your current loans...they are both
good rates for today's market.
> 3. Given our debt situation are we doing the right thing? I realize we are
> pulling out every bit of equity in our home and if the market collapses we
> will have more loan than home, but we are just not making ends meet right
> now. This appears to be our quickest way out of debt. It is also
> advantageous to have the interest on the 1st and especially the 2nd as a tax
> deduction...
No. Someone that has $200,000 in debt should not be driving a luxury
car. In fact, you are getting screwed on both of your loans. Since
this is a crunch time, where paying down lots of debt now will make a
huge difference in your net worth at retirement time, you need to make
some sacrifices now to ensure a better future. Dump both of the cars.
Buy your family a nice new Hyundi. They are cheap, and have 100,000
mile bumper to bumper warranties. And great finance rates (like 1.9%).
Fixing the car problem will save you quite a bit in monthly cash flow,
and free up cash invested in the two cars. Plus, while a lease is
usually a bad idea for most people, I would lease the Hyundi because
it makes your personal balance sheet look better to a mortgage company.
Next, use the cash from your cars and your better monthly cash flow to
pay down credit card #1 (the higher rate). Once you make a dent in
this, then start looking for a Home Equity loan that will allow you to
both pay off your current 2nd mortgage, and pull a bit more cash out
of your house to pay down more of your credit cards. But don't get a
new loan unless the closing costs are like $99, no upfront fees, and
nothing more than 12% (the rate is going to be a bit higher since you
are over the 80% loan to value rate).
Once interest rates drop again, and you have the credit cards paid off,
then you can try getting yet another H/E loan at a lower rate to pay
off the higher interest rate in the loan above. Again, look around to
find something with no closing costs (or $99 in fees at most).
The rules to this game are:
reduce interest rates ... which you are in good shape at the present
clean up your balance sheet ... by trading cars
increase monthly cash flow
pay down the highest rates first
no new debt or extra montly payments
once you are in much better shape, then try for the new mortgages
-john-
--
====================================================================
John A. Weeks III 612-891-2382 jwe...@visi.com
Newave Communications FAX 612-953-4289 http://www.visi.com/~jweeks
====================================================================
Tige Richardson
> In my opinion, your refinance makes no sense what so ever. You are
getting
> higher interest rates on each loan, and you are paying both closing costs
> and points ($2100) to get there. Keep your current loans...they are both
> good rates for today's market.
The only thing that scares us about the loan situation is the 7 year +
balloon payment on our current 1st. Maybe we could forego the 2nd at the
present time (leaving the equity in our home), but refinancing a 7.25% and a
9.5% loan at 7.5% fixed for 30 years doesn't seem like a bad idea to me
given our current situation (even with the $3985 in closing costs). It
guarantees we can keep our home as long as we make the payments and we don't
have that balloon at the end...I respect your opinion very much John as I
know you are very versed in finance, but is this really a poor idea?
One thing you didn't mention is how good/poor of a deal we are getting on
the loans in respect to fees/closing costs? Are we getting raked over the
coals? Are there much better deals out there?
> No. Someone that has $200,000 in debt should not be driving a luxury
> car. In fact, you are getting screwed on both of your loans.
Yes, we are planning on getting rid of the Blazer *at a minimum*. I also do
NOT like the interest rate on the Corsica (which is why I asked if we should
put the extra $3k at closing towards it and then refinance. Your suggestion
makes more sense (selling both and getting a cheap car at 1.9%)
> Next, use the cash from your cars and your better monthly cash flow to
> pay down credit card #1 (the higher rate). Once you make a dent in
> this, then start looking for a Home Equity loan that will allow you to
> both pay off your current 2nd mortgage, and pull a bit more cash out
> of your house to pay down more of your credit cards. But don't get a
> new loan unless the closing costs are like $99, no upfront fees, and
> nothing more than 12% (the rate is going to be a bit higher since you
> are over the 80% loan to value rate).
The current 2nd we are being offered is 10.6% (at 100% LTV) with about $1200
in closing costs. Not bad considering the LTV and interest rate. Plus it
would allow us to pay off the credit cards now, lower the monthly payment
resulting in more cash flow, and give us a tax deduction on the interest.
Plus the credit card at 5.9% will not be there forever (it is an intro
rate). I think psychologically it would be the best thing to do too! ;)
> The rules to this game are:
> reduce interest rates ... which you are in good shape at the present
> clean up your balance sheet ... by trading cars
> increase monthly cash flow
> pay down the highest rates first
> no new debt or extra montly payments
> once you are in much better shape, then try for the new mortgages
Again, thanks very much for you input John...it is appreciated! =)
Tige
John A. Weeks III <jwe...@visi.com> wrote in message
news:jweeks-1707...@24-216-73-52.hsacorp.net...
> In article <NFVj3.1885$xz4.1...@news.uswest.net>, "Tige Richardson"
> <trichard...@uswest.net> wrote:
> > My wife and I have a serious debt problem. We are refinancing our home
in
> > the hopes of getting rid of this debt and starting over. Here is our
> > current situation and debt followed by what we are doing about it and
some
> > questions we have at the very end of this post:
>
> A full answer was posted to another group (misc.invest.financial-plan).
> The net-net is that these new loans offer you no benefit, and they have
> higher rates, closing costs, and fees. This makes no sense at all to me.
SCat999999
>experts out there?
Is the $160,000 the largest amount you can get as a first mortgage? I would
maximize the size of the first. That would reduce your monthly paynment. As to
the $3795 left over...after you sell the Blazer, I would put $1000 in an
emergency fund, and then use the balance to buy a second car for cash. It's
really inconvenient to only have one car unless you live in an urban
environment.
If you can lower your monthly payout with a larger first...you can then start
saving some money.
Steve,LUTCF
Tige Richardson
Thanks for the great advice...here are answers to some of the questions you
posed:
> Debt is relative Tige, we need to know your income to help. If you make
> $100,000, this isn't that bad. If you make $45,000, you're drowning.
I make about $65k/year gross.
> It is a very dangerous move for people that can't control themselves. You
> can end up getting all the credit card debt back and still have the bigger
> home loan. You are then in a worse situation. This happens to MANY MANY
> people.
I agree and have to admit we have done that before. This time I will not
let it happen. It is very easy to get back in that situation if one is not
careful!
> Stick it in a savings account and LEAVE IT ALONE! It is there for
> emergency living expenses if needed. You don't want to get in a zero
> savings situation and be forced to consider using a credit card for
> something.
Good advice. We will need it to avoid borrowing in an emergency.
> If you feel like buying a new video camera or a trip to Cancun, get CASH
> not checks, hundred dollar bills, out of savings and pay for it. The
> reason I say this is because it will make you appreciate the cost much
more
> than that piece of plastic. You will consider the purchase and make a
> rational decision about whether you really need it or not. Hopefully you
> will decide it isn't worth it. The plastic steals this from you. It makes
> it easy to spend money. It is the same reason there are chips in Vegas
> instead of cash.
Again, excellent advice. This is 100% what happens. Cash is MUCH harder to
spend than plastic.
Thanks again Bruce for you help...you have a very focused, accurate view of
the problem...
Tige
Tige Richardson
> I'm a bit confused about the mortgage info but am assuming that your
> first set of mortgages doesn't include taxes and insurance and your
> second set of mortgage numbers does. I just wasn't clear on how much
> you would be saving.
Yes, I omitted this fact in my original post. Our current mortgage amounts
($795 on the 1st and $361 on the 2nd) are not including taxes and insurance.
Taxes are about $1400/year and insurance is about $35/month?)
> Not quite sure why you would want to re-finance a used car. Once it is
> paid off it is paid off. Or did you have another need for that money?? I
> also honestly didn't know you could re-finance a used car.
Well....I was thinking that the 11.49% rate was outrageous and that we may
be able to get a cheaper rate than that, but I think the best option may be
to sell the Corsica too and pay cash for a used car so we have NO payment.
Thanks!
Tige
Tige Richardson
> I'm confused about the whole idea of having first AND second mortgages.
> Why not have a slightly larger first mortage and use it to pay down
> some of your most expensive consumer debt, and then tighten
> your belt and aggressively pay off the rest over a relatively short time
> out of income? Especially since you're selling the Blazer.
> (you didn't mention what you were getting for selling the Blazer)
In order to pay off our current first and second mortgages we must finance
$160k. The home is worth $186k. Apparently the bank will not go over 85%
LTV on the first and we are pretty close to that at $160k. I don't have the
exact figures in front of me, but that is why we can't get a bigger 1st.
> The second mortgage is not only at a wicked expensive interest rate,
> but it's also 20 years! And it adds to the fees, paperwork, and
> complexity
> of the problem. And no-one is in a high enough tax bracket that having
> a deductible 10.6% loan is cheaper than a nondeductible 5.9% loan.
True, but the 5.9% is only for a 6 month intro period after which it goes to
13.9! It was a temporary fix until we could refinance. We would pay the 2nd
off as quickly as possible (making $1k payments/month). My estimates show
about 28 months to pay it off if we allocate everything we have towards it
each month.
> > We are working with a local company who acts as a
> >go-between and finds the best deals out there with lenders. For their
> >trouble it looks as if they are charging us $2100 for both loans. Is
this
> >correct?
>
> I don't understand what this $2100 is. Is this in addition
> to the usual fees?
This is a loan origination fee. (Points)
> I'm also worried that you are operating with no savings. Any
> possibility anyone can take a second job for a little while to
> accelerate the pay-down of all this?
We have been considering that as a last option. We are trying to put our
young children first so this does not affect them. My wife is a stay at
home mother. If anything, I will take a part-time job for a little while on
weekends if I have to.
Tige
Henry van Cleef
Tige Richardson <trichard...@uswest.net> wrote:
>Hi,
>
>Current Debt:
>==========
>1st Mortgage $116,000 @ 7.25% for 7 years w/ balloon payment at end of 7
>years ($795/month)
>2nd Mortgage $39,200 @ 9.5% for 20 years ($361/month)
>Credit Card #1 $9,000 @ 12.9% ($228/month)
>Corsica Loan #2 $6,000 @ 11.49% ($167/month)
>
>Total Owed on Home (1st and 2nd): approximately $155,200
>Current Home Value (appraised): $186,000
>
>What we are doing about this bad debt situation:
(rather convoluted list of stuff deleted).
I think that the first thing you have to address is getting on a
monthly budget and sticking to it, which means "just say no" to credit
cards and toys. Until you are on that budget and can demonstrate to
yourselves that you can live on it, I think you're just setting
yourself up for more debt.
An 80% mortgage, which is the traditional number, on a $186K place
should work out around $149K. That's $33K more than the current
mortgage with its balloon, although you can carry that a while longer.
Your payments right now are $2056/mo., and you are reducing debt with
this. Whatever you do, you need to schedule $2K/mo. into debt service
until you are down to paying on the first mortgage alone. $33K will
cover the credit cards and the Corsica, and leave about $6K, which
should be saved off as an emergency fund. You actually need to have a
bare minimum of 3 months expenses in available cash, and really should
have six and might schedule $200/mo into savings and $1800 into debt
service until you've built this up. $17K is an absurd amount to tie
up in an automobile. Get rid of it, and if you need a second car,
find a cheap beater.
Until you get out of hock, you are going to have to be religious about
putting away the $2K a month. That comes first.
You can simply brass this through and keep paying on what you have,
and getting rid of that Blazer will free up some money to use to pay
down the credit cards and the second mortgage, and get some savings
ahead, but you've got to work a balanced plan.
A new second mortgage? Why? You've got to reduce total debt, and
need to get rid of the second as a priority item after the credit
cards. First you've got to demonstrate the discipline to maintain
$2000/mo. into debt service and building an emergency fund, and as you
get rid of these balances, continue putting that amount into savings
and investments.
--
===================================================================
Hank van Cleef
===================================================================
lisa...@my-deja.com
> > I'm also worried that you are operating with no savings. Any
> > possibility anyone can take a second job for a little while to
> > accelerate the pay-down of all this?
>
> We have been considering that as a last option. We are trying to put
our
> young children first so this does not affect them. My wife is a stay
at
> home mother. If anything, I will take a part-time job for a little
while on
> weekends if I have to.
>
> Tige
>
Or maybe your wife would want to get a part-time job on the weekends?
That way you can spend more time with the kids and your wife would get a
break. I know it is still work but it would be different work for her.
She might also be able to improve job skills should she want to, or have
to, return to full time employment later. And the kids would probably
enjoying spending time with Dad.
Li
Michael Sullivan
Tige Richardson <trichard...@uswest.net> wrote:
>Yes, I omitted this fact in my original post. Our current mortgage amounts
>($795 on the 1st and $361 on the 2nd) are not including taxes and insurance.
>Taxes are about $1400/year and insurance is about $35/month?)
I add those in, and the total payment you're making now comes to
$1307/month. That's less than the proposed payment on the first mortgage.
That doesn't make much sense, since you're not pulling anything out of
that loan for other purposes. Not only that, you're scheduled to pay off
the current second in 20 years (maybe less if you're a few years in) --
this new mortgage is paid off in 30. Extending the life of the loan. It
looks like you're paying a bunch of closing costs for no, maybe
negative benefit.
I wonder if you're better off doing nothing. What about that balloon
first mortgage you have now? Is that a 30 year amort schedule, or
interest only, or what? If it's 30 year amort or quicker payoff schedule,
I'd say to heck with the refinance, just keep your existing first and
second mortgages. You can refinance the first to avoid your balloon in
due time. I wouldn't start worrying about it seriously until you have 5
or fewer years left.
One thing I haven't seen stressed enough in the replies here:
A lot of people in debt crises (or just little bumps) spend a lot of time
worrying about reducing their monthly payments, instead of worrying aobut
reducing their *spending*.
If you have been spending yourselves into consumer debt and not saving
money, your absolute number one, no question, before you do *anything*
else that's not a life threatening emergency financial priority is to
*stop*. Get your expenses (including debt payments) under your income by
5-10%, and do it *NOW*.
If you literally can't do that and still eat because your debt payments
are so high, then you need to think about selling expensive assets like a
car (preferably not your home, because that's one of the few consumer
assets that can qualify as an investment -- but don't hesitate to sell
your home if you'd be happy living in a much less expensive one). If that
doesn't work, the next stop is renegotiationg with your creditors. If
that doesn't do it, you start considering bankruptcy.
I doubt you're anywhere near that -- so you need to adjust your lifestyle.
Cutting up your credit cards is a great first step. Bear in mind the
hardest truth about financial reconstruction: credit cards don't spend
money -- people spend money. You need to do more than just cut up credit
cards, you need to adjust your thinking to your *real* standard of living.
When you've done *that*, and you've got a $3-500/month stream of free
capital, a few hundred extra in the bank (better yet a few thousand), so
you aren't lving paycheck to paycheck -- you may decide that it's simpler
to pay back your existing loans as you get the money.
The loans that struck me as critical are your Corsica loan at 11.49%
interest, and the 12.9% credit card bill. That's $15K that you want to
pay off as soon as humanly possible. They're also the only debt you have
that might justify paying loan costs to replace with 10.6% interest. Why
do you want to pay off 5.9% debt with 10.6% debt? That's silly.
Also think about how soon you'd pay off without a new mortgage. At
$500/month, you can get rid of that 15,000 in 2.5 years, maybe less than 2
years if you keep applying the current payment, as your minimum goes down.
In that time, you might pya $3000 total in interest on those two loans. Is
it worth getting a home equity loan at 10,6% where you have to pay over a
thousand dollars in closing costs? You'll still pay at least 1900 in
interest even subtracting the tax benefit at 10.6% if you pay it in 2
years. Add that to the closing costs, and you're doing about the same.
I'm not sure you come out clearly ahead unless you hold the loan for
longer than you should want to, and you're behind if you find the
wherewithal to pay it off faster.
Selling the Blazer is probably a good idea. Get a cheap second car, or do
with one, if you live in an area with decent public transport, or
carpooling makes logistical sense. That frees up $335 for paying off debt
right away.
Seriously, you should treat 10% of your income for paying off debt (and
later for long term saving/investment) as a debt that is due. Pay it to
yourself in a separate account, just as you'd have to pay the bank. Do it
before anything else -- it's just as important to your long term financial
health as making the payments on your debt.
When you run numbers on restructuring your debt, don't just look at
monthly payments -- that's what the people trying to sell you your new
debt want you to do -- instead look also at expected payments over the
life of the loan. Does paying the same amount you are planning to pay on
your current debt pay it off *faster* under the new situation? Or are you
actually getting further into debt for the sake of reducing your monthly
payments? The first is good frugal debt strategy. The second is called
throwing good money after bad. It only looks tempting if you haven't
faced up to your true standard of living.
I don't have all the information, but from what you've posted, your debt
restructuring proposal has red flags all over it. I'd do some serious
rethinking before you sign any papers.
Michael
eden...@iname.com
Michael,
Excellent analysis and advice!
My view is that the biggest problem is not financial,
but lifestyle and spending habits. Need a total
reversal of attitudes and stop playing with
the numbers to try to get out of a deep hole.
My advice is to take the big pill now!
Sell the house and cars. Rent and buy some
cheap transportation. Come back for advice when
you've got a net worth of at least $100K.
Edenbrook
Tom & Kathryn Boyd
>
> > I'm also worried that you are operating with no savings. Any
> > possibility anyone can take a second job for a little while to
> > accelerate the pay-down of all this?
>
> We have been considering that as a last option. We are trying to put our
> young children first so this does not affect them. My wife is a stay at
> home mother. If anything, I will take a part-time job for a little while on
> weekends if I have to.
>
> Tige
May I suggest that your children would benefit from *your* presence, as well
as your wife's? You and your wife would need to decide what's best based on
your situation, of course, but I imagine that it could be a very positive
thing for the children to have time alone with Dad for a few hours on the
weekend or some evenings.
- Kathryn
Tige Richardson
$25K on it! It is the only asset we have right now. Personally, I just
don't feel it is time to sound the alarm to that extent. We are selling the
cars definitely and are commited to a different lifestyle, but renting is
throwing money out the window. We have $25K+ equity in our house right now
and selling it would be crazy in my opinion...Real-estate projections in our
area say that this time next year it will be worth close to $200K.
Please remember that we *are* making all of our payments on time and we have
perfect credit ratings. The problem is cash flow caused by overspending and
poor decisions (the cars). I think this is definitely fixable without
resorting to such extreme measures just yet...
This is an unfortunate situation but we all need advice at different levels
from time-to-time...
Thanks for everyone's input...
Tige
Tige Richardson
and the reasoning for the new 1st and 2nd. If anyone would like to advise
us it would be very appreciated! Thank you all so much for your help....as
you can imagine it is quite distressing and very difficult for us to
"expose" ourselves like this. But you have all been very kind...thank you.
Tige
===
Current 1st and 2nd Mortgage:
======================
-1st Mortgage $116,000 currently owed. 6 years remaining on a 7 year fixed
7.25% loan with balance of loan due as a balloon payment at end of term.
-2nd Mortgage $39,200 currently owed. 19 years remaining on a 20 year fixed
9.5% loan.
-Total Payment on both loans= ($795.21 + $361.01) = $1156.22 Principal and
Interest only
Proposed 1st Mortgage -
===================
Reasoning for loan: To pay off our current 1st and 2nd mortgages and reduce
the overall interest rate on both loans from 7.25% on first and 9.5% on
second to a *combined* rate of 7.375% and get rid of that balloon payment!
Amount financed = $160,000 for 30 years fixed at 7.375% (includes payoff for
current mortgages, $3985 in closing costs, LOF, etc.)
Total Payment = $1118.74 Principal and Interest
Proposed 1st mortgage results in monthly net savings of = $37.48 (would take
8.86 years to cover closing costs on the 1st mortgage based on the monthly
savings...i.e. not much of a savings)
Proposed 2nd Mortgage -
===================
Reasoning for loan: To payoff outstanding credit card debts by effectively
using the equity we have gained in our home over the last year and increase
our monthly cash flow in order to more aggressively tackle our debts by
paying more than the minimum every month.
Debts to be paid off:
Credit Card#1 $12,400 at 5.9% currently but will catapult to 13.9% in
September
Credit Card#2 $ 9,000 at 12.9% currently
Total Minimum Credit Card payments = $478.00/month
Amount financed to pay off debt = $22,605 for 20 years fixed at 10.6%
(includes payoff for both credit cards, $1205 in closing costs, and a $500
LOF).
Total Payment = $261.33/month
Proposed 2nd mortgage to pay off consumer debt results in monthly net
savings of = $216.67 (would take 5.6 months to cover closing costs of $1205
on this loan).
1st and 2nd COMBINED monthly savings = $254.15 (Saving this amount it would
take 24 months to recover closing costs on BOTH the 1st and 2nd loans)
Cars -
=====
- Estimated Blazer Expenses
$355/monthly payments
$70/month insurance
$80/month gas
$30/month service (average)
Total monthly savings $ 535!!!
Monthly Net Savings (1st, 2nd, and Blazer) = $789.15
- Estimated Corsica Expenses
$167/monthly payments
$50/month insurance
$40/month gas
$30/month service (average)
Total monthly savings $ 287!!!
Monthly Net Savings (1st, 2nd, Blazer, and Corsica) = $ 1076 !!!
==================
We estimate that we can "trim" our lifestyle to the tune of $500/month (not
eating out, cutting unnecessary subscriptions, reducing recurring expenses,
being smarter about groceries, etc.) This would result in about $1500/month
cash flow.
At this point we would pay $2k cash for one car (no financing). We would
save for two months to get $3k in the bank. Then we would start putting
this $1500/month towards the 2nd mortgage. It appears to me that we could
have the 2nd mortgage knocked out in about 15-20 months...and we then have
all the equity back in our home. Then we would save for a few months, buy
another car (paying cash) and start again on the 1st mortgage with $1000k
month (out of the $1500) going towards the 1st mortgage and the leftover
$500/month going into savings...
Would this work and is it sound from a financial perspective??? The only
thing I don't like are the closing costs involved...but otherwise we are
lowering the overall interest on all our debts while increasing our cash
flow to put $2k in savings initially and paying off the second mortgage...
Thanks for your comments and advice!
Tige
Michael Sullivan <m...@panix.com> wrote in message
news:7mvel0$4lm$1...@panix2.panix.com...
Danielle Chollet
I can understand your desire to get a fixed rate 30 yr loan and get
rid of that balloon deal and the second mortgage at the same time. It
seems like getting the $160k first mortgage at 7.35% is a good thing,
however, it seems like those fees are quite high. I would expect them
to be about half that, that would be one point, plus some extra for
appraisal and title fees. I'm sure you can find other brokers/banks
who would be glad to make closer to $2000 in points/fees.
Getting a new 2nd mortgage at a cost of $1200 in fees doesn't seem
worth it, though. Since you are already committed to paying them down
quickly, I would suggest just transferring cc balances to low intro
rate cards every 5/6 months. You should be able to keep the rate
around 5-6%. I just got a Discover Platinum application for 3.9% on
balance transfers till y2k, no annual fee. Your salary should be able
to get you quite a high credit limit for the balance transfers.
Just by selling the Blazer, refinancing, and "trimming" your budget,
you've got 535 + 37 + 500 = $1072 extra a month to pay down the cards.
Add that to the $478 a month that was being paid to the other cards,
anyway, and you now have $1550 a month to attack your transferred
credit card debt. That comes out to 14 months payoff date if you
keep transferring the balance and maintaining a 5.9% intro rate,
that's only three cards you'd have to do the transferring between.
Obviously, If you keep the Corsica, it'd make more sense to pay off
that loan first, since it is a high rate, but using only the $1072
saved, you could get that done in 6 months. Then go after the credit
card balance with the full $1550+$167 freed up from the previous car
payment. That's $1717 all together. From that point, the cc balance
would be retired in 11-12 months.
This puts you in the same ballpark as the plan you described, but
without having to get rid of the Corsica, and without having to pay
thousands extra in loan fees. I would think since you are downsizing
to one car, you would want it to be very reliable, you know your
Corsica, and have already paid for the initial depreciation on it. It
would be my choice to keep it, but some others are more comfortable
with cheap, older cars. You have to go with your own comfort level,
there.
Let me know if I screwed up some calculation, but I think this is a
viable solution.
Good Luck,
Danielle
Kenneth Almquist
> ===================
> Reasoning for loan: To payoff outstanding credit card debts by effectively
> using the equity we have gained in our home over the last year and increase
> our monthly cash flow in order to more aggressively tackle our debts by
> paying more than the minimum every month.
>
> Debts to be paid off:
> Credit Card#1 $12,400 at 5.9% currently but will catapult to 13.9%
> in September
> Credit Card#2 $ 9,000 at 12.9% currently
> Total Minimum Credit Card payments = $478.00/month
>
> Amount financed to pay off debt = $22,605 for 20 years fixed at 10.6%
> (includes payoff for both credit cards, $1205 in closing costs, and a $500
> LOF).
I don't think that this makes sense because of the closing costs. The
following table shows the end of month balances for the mortgage and for
a 13.9% credit card, assuming that you are paying off the debt at the
rate of $1500/month:
--- loan balance ------------
month mortgage 13.9% credit card
0 26000.00 24795.00
1 24719.21 23565.38
2 23427.62 22322.36
3 22125.14 21065.78
4 20811.68 19795.51
5 19487.15 18511.37
6 18151.45 17213.24
7 16804.48 15900.95
8 15446.17 14574.35
9 14076.40 13233.28
10 12695.08 11877.59
11 11302.11 10507.11
12 9897.40 9121.69
13 8480.85 7721.16
14 7052.35 6305.36
15 5611.81 4874.12
16 4159.12 3427.27
17 2694.19 1964.65
18 1216.91 486.07
19 -272.83 -1008.62
What the negative balance at the end of the nineteenth month means is
that you don't pay a full $1500 that month. For the mortgage, your
final payment is $1500 - 272.83 = $1227.17. For the 13.9% credit card,
your final payment is $1500 - 1008.62 = $491.38. In other words, you
save $735.79 by sticking with the credit card. I assumed a 13.9% rate
for all your credit card debt to make the calculations simple, but you
since one of your credit cards charges only 12.9%, so this understates
the advantage of sticking with credit card debt.
If you pay off the debt at the rate of only $1000/month, then it will
take you 30 months to pay of the debt, and the 13.9% credit card comes
out only $408.10 of the mortgage. If you pay only $763/month, then
the mortgage does as well as the 13.9% credit card debt--but you plan
to pay more than that.
Kenneth Almquist