As I wrote in "Tiny Steps," I had started making slow but steady progress. I watched my
budget carefully and worked hard, applying everything extra to my credit card with the
lowest balance (Visa, starting balance of $9,900). With credit counseling and loan
consolidation eliminated as options, I looked to my dwelling.
Recovery of home prices in north Texas after the 2008 housing bust had been fairly
rapid. My one-story brick ranch, purchased for $165,000 in 2005, was now worth
$182,000. Thanks to a 15-year mortgage at 5% APR, I only owed $129,000. Prime
mortgage rates had dropped to just under 4% in the summer of 2013.
I didn't have stellar credit anymore, but I managed to qualify for a loan for 4%
APR. Not bad. I was allowed to borrow 80% of my home's value ($145,600) in
September 2013. After fees and closing costs, I received $14,000. I used this to pay
down my car ($5,800) and to shrink my credit card debt to
just under $30,000.
Doing so gave me the biggest bang for my buck, freeing up over $350 dollars in my
monthly budget. Additionally, my mortgage payment dropped from $2,050 to $1606. In
under a year I had reduced my unsecured debt by 25.4%. I could now make ends meet
and slowly discharge the debt without working overtime.
While I was still willing to work hard, I was starting to buckle under the strain, falling
ill frequently. Early in 2014, I was diagnosed with a chronic illness.
Rolling debt into a mortgage is not "getting out of debt.” It is simply a reallocation
(Robbing Peter to pay Paul because Peter charges lower interest).
Huettner Capital president Todd Huettner manages a mortgage brokerage firm that
specializes in debt consolidation. Huettner suggests homeowners answer three questions
before combining debt with a home mortgage:
1. Why do you have this debt? As I mentioned in "Stopping the Bleeding,"
consolidation must accompany a change in spending habits (living on a sound
budget). Failure to do so only results in a bigger mess.
2. What are the costs of consolidating the debt? As I noted above, I needed to pay
nearly $2600 in fees and closing costs. I'm now paying that back (with interest of
course). Because I was able to finance to a lower interest rate, I will save money in the
long run (five years-plus).
3. Is there a more effective way to eliminate your debt? If you have less debt, or when
cash-out costs are high, stick with paying the old-fashioned way. While failing to pay on
credit cards may bring a lower credit score and some nasty phone calls, your house can't
be taken. Defaulting on a mortgage or home equity loan is a different matter.
All things considered, this was the best option for me. I needed some breathing room. I
needed to work fewer hours. I needed to take care of me.
Personal finance experts and their proscribed debt fixes are many: Jean Chatzy's “Debt
Diet,” Dave Ramsey's “Financial Peace University,” Suze Orman's “9 Steps to Financial
Freedom.” etc. Rolling debt into a mortgage is not high on the list of recommendations of
any of them. Overall, however, their principles are the same: Reduce your debt and
increase wealth through budget discipline and living within your means. I have taken tips
from each, with Dave Ramsey being one of my favorites. It is my life and my money.
Ultimately I have to do what works for me.
