Q: Last year I refinanced my house to draw part of the equity out as a part of a divorce settlement.
I took out a 15-year mortgage at 5.375 percent. My payments are $1,151 a month.
I’m thinking about refinancing again to give myself some room each month and to accelerate paying off a credit card that I let get out of hand last year. I’m thinking about using a company that advertises “no cost”; refinancing on the radio. I’d get a 20 or 30-year mortgage. Is this a good idea?
A: Here’s the short answer: Don’t do it.
You have a wonderful interest rate for your mortgage. If you refinanced today, you’d be paying at least 6.375 for your new mortgage, or a full percentage point more than what you’re paying now.
Instead, you’re better off getting a home equity loan to pay off your credit card debt, and then working hard (perhaps even taking a temporary second job) to pay down the home equity loan as quickly as possible.
With a 15-year mortgage, you’re adding quite a bit to your equity each month, and in 14 years you’ll be done with your mortgage. While getting divorced probably ate into your financial future, paying off your mortgage in 14 years gives you a golden opportunity to rebuild your net worth.
Although times might be tight for the next few months while you pay off your credit card bill, you’ve got to keep your eye on long haul, and the financial security you can achieve by reining in your spending and maintaining some fiscal prudence.
I know you can do it. Good luck.
Jan. 19, 2009.