A Florida Mortgage Refinance Question and Answer

The following is a question and answer with Don Taylor of Bankrate.com. The situation referred to - and advice given - could apply to anyone with debt and/or a Florida mortgage loan …

Question: I am thinking of mortgage refinancing to pay off credit card debt, but I live in Texas and my loan-to-value ratio is too high to get cash out. I have been offered what is basically a negative amortization loan, a five- or seven-year ARM where the rate is locked in. If I take the minimum payment option, I can use the extra money each month to pay off credit cards but I am worried about how much I will be adding to the back of the mortgage loan.

We will be looking to move within five years, but have been told that it will be no problem to [Florida mortgage refinance] after, say, two years when hopefully all the card debt will be repaid.

The company offering this loan has told me that I will add back about $9,000 to the loan over a two-year period, but I will save thousands in credit card interest. It seems to me that this is just like a cash-out refinance but you don’t get the cash all at once. Our credit is “fair,” we have about $25,000 of equity in the property and owe about $12,000 on our credit cards. Should I go for it?

Answer: Replacing credit card debt with mortgage debt doesn’t pay off your credit cards; it just restructures your finances. According to Bankrate’s 2006 closing cost survey, the average cost of refinancing a first mortgage is $3,024. You’re considering doing that twice in two years. Paying $6,048 to restructure $12,000 in credit card debt isn’t going to save you money.

Would you pay six grand to refinance 12 grand? I wouldn’t.

Negative amortization exists when your monthly mortgage payment isn’t big enough to cover the interest expense. The shortfall gets added to your loan balance. Instead of paying down the loan, your loan balance increases with time.

The [Florida mortgage loan] agreement is likely to stipulate that the minimum monthly payment gets recalculated if the loan balance increases by a certain percentage over the initial mortgage amount. When that happens the money you thought you had freed up in your monthly budget isn’t there anymore.

The Federal Reserve Board publication, “Interest-Only Mortgage Payments and Payment-Option ARMs,” discusses this risk in greater depth.

If you think being upside down in a car is rough, try being upside down in a house. With $25,000 in equity, a plan to tap $12,000 of that to restructure your credit card debt doesn’t leave much room for a downdraft in housing prices or a real estate commission check if you had to sell.

Chip away at the outstanding credit card balances and stop looking to your home’s equity to save you from spending more than you make.