A reply to a reader: Rolling your debts into a new housing loan

By: Zeng Han Jun, CPCG, Singapore

Recently I had a reader writing in to me, asking about rolling of debt into her housing loan.

This is what she wrote:

Dear Sir:
This is my question:

A mortgage banker is willing to refinance both my first mortgage and a home equity loan that I took out for my daughter's education. In addition to that, they have suggested rolling an additional 10,000 dollars in credit card debt into the mix which, they say, will leave me virtually debt free.

My gross anuual income is about $52,000 with my net income being about $46,000. The recently appraised market value of my home is about $180,000. The following is a list of items to be refinanced in the

new mortgage: 92,000
previous mortgage 33,000
home equity loan 5,000
taxes 500
home owners insurance 10,000
additional debt 140,500.

They have quoted a rate of 6.2% and they tell me that my monthly mortgage payment will amount to about $1220. This is particularly frightening since I have been paying about $600 per month on an ARM mortgage. However, when I add up all of the other monthly payments (the additional items being rolled up into the refinanced mortgage) they really do add up to just over that $1200 figure.

I would appreciate any advice you may be able to give me.

My answer is as follow:

Credits can be extremely useful, especially in times of uncertainty like what we are experiencing now. This is especially so for revolving line of credit. What is revolving line of credit? They are facilities like credit cards and overdrafts. They allow you to draw credits and when you have repaid those credits, you can start using them again.

For your credit card. I do not see a need to roll that in as well. I am assuming that you are a prudent credit consumer who pays the monthly bill promptly. A credit card, though deemed as vile among certain financial consumer, can be a very useful tool to leverage on. A credit card is a revolving line of credit, and can drawn upon in times of emergency. I suggest that you keep that card as it is.

I suggest that you refinance your home equity loan together with your housing loan into a new loan. In fact you have to do it because these two facilities are inseparable. You cannot refinance that housing loan to another bank while keeping the home equity loan at the old bank. However if the contract actually allows you to do that, see if the new loan offers a lower interest rate than your home equity loan. If it is, just roll both of them into your new loan.

PS: Dear lady, I have been trying to reply to your email for quite some time, but I could not get my email through. It seems like your inbox is full. This is the only way I can get back to you. I hope my reply is timely enough for you to make an informed decision.

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