We have 12 yrs left on our 1st TD. It’s an ARM with a current rate of 2.75% and adjusts annually in June. We also have a HELOC with the entire 50k balance due as a balloon payment in 2023, interest-only payments at 4.5% until then. We presently have a fair credit score (650-670) and >50% LTV equity in the home. We have other credit card debts totaling ~20k, with interest rates ranging from 12-25%.
Should we do a 15yr fixed cash-out refinance to consolidate all debts into one payment? Or is it better to leave the 1st TD alone and try to refinance just the HELOC for 10 yrs instead?
Should we use 10k available cash to pay down consumer debt or fund IRA this year and maximize contribution to employer-sponsored 401k?
Thank you very much for your time.
Thank you for the brain-twister question.
Let me walk through this how I prioritized things.
The balloon is my primary concern unless you are planning to sell it before it is due. I’m not a personal fan of balloons because they are like flat tires; they never happen at the best time.
I’m not a fan of adjustable-rate mortgages or 15-year mortgages.
I prefer a fixed-rate mortgage that I can count on because rates will only go up. I’ve lived through crazy interest rate times.
I’m not a fan of the 15-year mortgage because it backs you into a higher payment and can’t give you room if you have a financial crisis. There is nothing that prevents a 30-year mortgage from being repaid at 15-year rates. If you find yourself in a tough spot, you can drop the payment back.
Your risk tolerance might be entirely different than mine.
A concern of mine from reading your question is how the credit card balances got so high when your mortgage and HELOC obligations were so low?
If finances have been tight and expenses have been landing on credit cards to make ends meet, that would lead me to a different conclusion.
There is no crystal ball to predict what will happen one moment in the future. If you feel confident the economy is improving, you might want to focus on improving your credit score by dealing with the items that are causing your score to be reduced. In 18 months, you could have a better credit score and go for a refinance then.
To improve your score might include reducing your card balances, dealing with past problem debt, or maybe an active collection issue. You can use the credit score simulator for free at CreditKarma.com and look over a couple of your credit reports there.
But you are left with a question only you can answer. Will the future be full of higher interest rates, or is it better to refinance now with a lower credit score at lower rates even though your interest rate will be higher than that of people with a better credit score?
When you do a cash-out refinance, you might find your interest rate will be higher. However, you do have a good amount of equity.
When you convert consumer debt like a HELOC or credit card debt to a lien against the house, you put your home at a higher risk of foreclosure if you fall on hard times.
From my point of view, this might be a time to stop all the temporary and interest-only borrowing and put a fixed mortgage solution into place. One option would be to go for a fixed-rate 30-year mortgage and refinance the first mortgage, HELOC, and credit card debt into one mortgage. You can then repay this with what your corresponding 15-year mortgage rate would have been.
Finally, your question about how to best use the $10,000 of cash is just as complex. Of course, paying down debt is always a good thing. It can also be a good thing to have an emergency fund with $10,000 in it or increase your retirement savings and watch that grow for when you will need it most.
For me, it all depends on what your financial life is. If you have to use credit to make ends meet in unexpected times because you don’t have an emergency fund, then building savings is smart.
If you can handle the unexpected cost of an expensive home or auto repair without putting it on credit, then investing in your future is the smart choice.
Ultimately, with the underlying complexities and your comfort with risk and uncertainty, I would suggest you schedule a call with my friend Damon Day and talk through all of these issues to get advice on what will work best for you.
Damon does not sell investments, so his advice is not swayed trying to get you to invest in anything.
You are not alone. I'm here to help. There is no need to suffer in silence. We can get through this. Tomorrow can be better than today. Don't give up.
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