Make a Resolution to Pay Off Your Holiday Debt
Mortgage News from Quicken Loans
The year 2007 is nearly upon us and everyone (ok, maybe not everyone) is making New Year's resolutions. So while you're at it, why not add one more important one to your list: refinance your mortgage to pay off your bills. Paying off your bills by refinancing, especially with the debt you just racked up for the holidays, can create some great financial consequences for you.
Improved Credit
By paying off your high-interest credit card bills, you stand to gain much because by lowering your debt ratio (the amount of debt you have compared to the amount of money you make), your credit rating can go up. It's a sign to lenders and creditors that you are responsible with managing your debt. Consequentially, if your credit improves, you can get better interest rates on the loans you take out.
Increased Cash Flow
By refinancing your mortgage you can increase your cash flow. How? There are a few ways. First, you can refinance to a larger loan than you already have. Let's say your mortgage balance is $100,000 and you refinance to a new mortgage of $120,000. The extra $20,000 you took out could be used to pay off bills, finance home improvements, or what have you.
Second you can refinance to a mortgage that decreases how much you pay every month. One way is to get an interest-only mortgage whereby you are only required to pay the interest due each month; though, you can always pay as much principal on top of that as you wish. By paying less toward your mortgage, you're increasing the amount of money you keep in your pocket, effectively increasing your cash flow. Another way to lower your payment is to change the rate on the mortgage you have--if you can get a lower interest rate, your monthly payment decreases; again, you increase how much you keep in your pocket. Not only that, mortgage interest rates are generally lower than that of credit cards.
One mortgage that lowers your monthly payment significantly is an option ARM. Option ARMs give you incredible flexibility in how much you pay monthly toward your mortgage. You're given the choice of paying the equivalent of a 30-year fixed rate mortgage, a 15-year fixed rate mortgage, an interest-only mortgage, and the minimum payment. When paying the minimum, you pay less than the interest due for any given month. So your monthly payment can be significantly less than if you had, say, a 30-year fixed.
Some option ARMs offer a rate that's fixed for up to five years--this is what you should look for so that your rate can't adjust too quickly or too often. And all the money you can save by getting a mortgage that lowers your monthly payment is money that can go toward your high-interest credit card bills.
Tax-Deductible Interest
Remember that mortgage interest is usually tax-deductible. In the beginning years of most mortgages, you pay more toward interest than you do toward principal. And while you can't deduct the interest you pay toward your credit cards, you can deduct what you pay toward mortgage interest on your taxes, though you should always check with your tax advisor. Being able to write off the interest on your taxes means you're keeping more money in your pocket that can be used toward paying off debt.
So this year, make a New Year's resolution to pay off your debt by refinancing your mortgage. You can make yourself free of high-interest credit card debt, improve your credit, and benefit from great tax deductions. Be sure to consult an experienced mortgage banker to get all the information you can.
This article is reprinted by permission from Quicken Loans © 2006 Quicken Loans Inc. All rights reserved.
