Be Wary of Florida Home Mortgage Offers That Help Consolidate Your Debt
Faced with financial trouble, many hopeful owners bear down and still try to find a way to receive approval on a reasonable Florida home mortgage loan. As they should.
However, it’s important to be wary of offers that seem too good to be true. A handful of buyers attempt to kill two birds with one stone by consolidating their debts WITHIN the new purchase Florida mortgage. Typically, this isnt a good idea. Take the example below:
I have $30,000 in cash for a down payment on the $300,000 house I am purchasing. I also have $15,000 of credit card debt at 12% that I would love to get rid of. The loan officer says I can roll it into a new $285,000 30-year mortgage at 6%.
This cuts the rate on my credit card debt in half and makes it deductible. Further, my total monthly payment would be only $1891, compared to $2,051 if I didn’t consolidate and took a $270,000 loan. Is there any reason I shouldn’t consolidate?
Show caution with combination Florida home loans
Simply put, the above consolidation will make you poorer.
Granted, the rate on the Florida mortgage is well below the rate on your credit card debt - and mortgage interest IS tax deductible. However, if you increase the size of your loan from $270,000 to $285,000, you will increase either the mortgage insurance premium or the interest rate on the purchase mortgage. It takes only a ¼% rate increase on $285,000 to offset the savings from a 6% rate reduction (including the shift to deductability) on $15,000 of credit card debt.
Moreover, debt consolidation such as this would reduce your total monthly payment, but that’s mainly because you would be paying down your debt more slowly. If you consolidate, you will owe $260,484 at the end of 6 years, for example. If you don’t consolidate, you will owe only $246,774.
In making decisions about consolidation, borrowers make two kinds of mistakes:
- One is to base the decision on the monthly payment, ignoring what happens to the Florida mortgage loan balance. This mistake pervades numerous financial decisions.
- The second mistake is for borrowers to decide in advance that they are going to consolidate … and only shop for mortgages that allow it. Their focus is the cost difference between the non-mortgage debt and the mortgage that would consolidate that debt. They ignore the fact that if they don’t consolidate, their Florida mortgage would be smaller and, therefore, less costly.
Need a rule of thumb on the matter? Try: consolidation is profitable if the rate on the first mortgage is below the rate on non-mortgage debt; AND if the rate or mortgage insurance premium on the first Florida home mortgage is no higher with consolidation than without.
It can be a complicated issue, but speaking with one of brokers and it should be easier to understand all your options.
