2. Mortgages and Credit Card Debt

Help, My Home Equity Loan Payments Are Too High!

Q: We have been upgrading our fixer upper and are interested in continuing the process. Problem is, our second mortgage is a line of credit (LOC) and the APR (annual percentage rate) is drowning us! We want to pay off the LOC and our credit card debt and have some cash to invest in renovations.

We are a single income family and as far as our debt-to-income ratio is concerned, we're not looking so good. We are hopeful our "sweat equity" will be sufficient to borrow against. I am not so keen on this approach but my husband is in the building trade and feels our only way is up as far as property value is concerned. What to do?

A: First off, I believe it is wise to upgrade your home if you are smart about making improvements that improve the value. It can be a good investment, as well as fulfilling.

I am surprised that your LOC (home equity line of credit) interest rate is so high that you would say it's drowning you. There are benefits with home equity loans, well, at least one, which is the tax write off. Another should be a lower interest rate when compared to other loan options. But I'm not getting that vibe in your case.

My understanding of your question is that you want to fix up your house, borrow money against its new value, and then pay off the LOC and credit cards. Assuming that this is the case, it's not the debt that is the trouble, but the cost of this debt. You're trying to reduce this cost by reorganizing the debt. That's a good strategy.

Of course, you may have trouble getting a third mortgage. Lenders don't want to line up behind two other lenders, even with your home as collateral. You may want to refinance all your debts into one new, 30-year mortgage at a low rate. I suggest a 30-year fixed rate loan to keep your rates low. You can find out what rates you may quality form, and the monthly payment, at Lender Rate Match.

This is a good plan, but one that may take a while. In the interim, I would look at refinancing some of these debts at lower rates. You want to include new credit options in this search. I have a quite a few low rate credit cards listed here.

DO IMMEDIATELY: Contact your credit card issuers and attempt to negotiate lower rates on your balances. Tell them that you're going to be renovating your house and, therefore, making large purchases. Tell them that if they want you to use their credit card for these purchases, they must reduce your current rates and your purchase rate or you will use another credit card.

1. Should I Refinance My Mortgage to Pay Off Credit Card Debt?
   
   
2. Help, My Home Equity Loan Payments Are Too High!
   
   
3. Should I Pay Off Credit Cards or Save For Home Purchase?