Q: I recently became a small business owner and have acquired a nice amount of debt getting my business started. The debt is currently on two low interest credit cards.
I am a homeowner with quite a bit of equity in my home. Should I increase the line amount on my home equity credit line to transfer the debt from the credit cards?
My second dilemma is that I currently have an adjustable rate mortgage that I am looking to refinance. Will increasing the amount of the mortgage affect refinancing in any way?
A: The question about your business debt is interesting. The answer depends on how you set up your business.
For example, if you incorporated your business and the debt belongs to the business, then transferring it to make it a personal debt might not be the right way to go. If it’s a business debt, without a personal guarantee, and it resides on business-owned credit cards, if your business fails you may not have to make good on the debt personally.
However, if the debt is personal, and you’ve personally guaranteed it on your own credit cards, then you may want to refinance your mortgage to move the debt to something that would have a more manageable interest rate over a longer period of time.
Either way, you need to talk to your accountant or tax advisor to go through the various business issues. You should also raise the question of how to document your business debt, just in case something happens or you decide to sell the business.
As for refinancing, you may pay a fee of up to .75 percent of the amount of your new loan if you increase your mortgage amount when you refinance. While this shouldn’t affect whether or not your interest rate rises (unless the loan will exceed $330,700, which is the point at which a conventional loan turns into a more expensive jumbo loan), you’ll want to sit down with a couple of good loan officers to walk through the costs and benefits of refinancing.
Q: I am a first-time home buyer and am uncertain about the steps to take.
We are purchasing a new construction and the builder is pushing us to go with their lender in order to receive a promotion of $4,000. Their lender, however, is giving us a rate of 5 percent for a 7-year adjustable rate mortgage and is also requiring us to pay part of the closing costs up front.
Is this normal?
A: Let’s start at the top: New home builders will often partner with a lender so they can guarantee you a fairly competitive, long-term deal on mortgage rates. Most conventional lenders will require you to pay a quarter or half point in order to lock in the interest rate over a long period of time.
Is this a good deal? You won’t know if this is a good deal until you’ve shopped around. So, go to Bankrate.com and see what other lenders in your area are offering for their 7/1 ARMs. I think you’ll find that 5 percent with zero discount or origination points (which isn’t quite the same thing as zero fees, but is close) isn’t a bad rate right now.
Getting $4,000 off the price of your home isn’t too bad either, and you have to factor that into the equation.
As for closing costs, what are they? Many lenders require that you pay closing costs at closing, but it’s the “upfront” that concerns me. What does the lender mean by paying part of the closing costs upfront? Is the lender asking for an application fee? That might be normal. But I wouldn’t pay the lender thousands of dollars upfront. In fact, you shouldn’t pay the lender anything other than a small application fee until the closing.
Overall, it sounds to me like you’re not really sure what is going on. The only answer I can tell you (since I’m not there looking over your shoulder at your paperwork) is to do your homework and research what the best lenders in your area are offering. Then, you can go to the builder’s lender and negotiate the best deal possible.
And that deal may not be good enough, even with the $4,000 bonus your builder is offering if you use his lender. So sharpen your pencil, pull out a piece of paper and a calculator and figure out how you’re going to save the most money.
Only then will you know if you’re getting a good deal — or not.
Jan. 19. 2009.