Refinancing mortgage and credit card debt

Scott,

I have a question about rolling credit card debt into a home mortgage.

If I have a current mortgage balance of around $66,150 at 8.25% fixed rate, monthly payments, with 21 years left on a 30 year mortgage, How much do I save if get a 15 year mortgage at 4.85% fixed rate, biweekly payments, with $10,190 of credit card debt added which is currently at 9.99%?

I have been a subscriber for some time now, and our local credit union recommended we do this instead of doing just the home mortgage and then a separate loan for the credit cards. They also told us that by paying biweekly we would knock a few years off the 15 year mortgage.

I read your newsletters all the time and have found it helpful in helping us to get our finances in order before I retire in 8 years. We are almost debt free of credit cards and we look forward to being able to live without being enslaved to the credit companies. If you use this in your newsletter use my first name and last initial.

Thanks Scott you are an asset and inspiration to millions of people in these terrible economic times.

Shawn M.

This is an involved math problem–which I love. 🙂 It’s important that we do an apples-to-apples comparison. That means we have to keep your payments constant. Here we go…

STEP 1: Figure out the numbers AFTER you refinance at 4.85%.

Current Mortgage Balance: $66,150
Credit Card Balance: $10,190
—————————————
Total Principal: $76,340

Refinance APR (Annual Percentage Rate): 4.85%

Loan Period: 15 years

Using the DebtSmart Loan Calculator…
Monthly Payment: $597.75

Biweekly Payment Amount: $597.75/2 = $298.88

Using the DebtSmart Loan Calculator…
Loan Repayment Time with Biweekly Payment: 13.35 years (347.20 biweekly periods)

Total time paying $647.57 per month is 13.35 years or 160.2 months.

STEP 2: Find the total time to repay original loans based on the amount you’re willing to pay for the refinance in Step 1.

Total willing to pay is $298.88 every two weeks.

Monthly: ($298.88 x 26)/12 = $647.57 (same monthly amount as the refinance in Step 1)

Using the DebtSmart Loan Calculator…
The monthly payment that will repay the $66,150 mortgage balance at 8.25% APR, in 21 years: $553.20

From the $647.57 you will use $553.20 for your mortgage and the difference, $94.37, for the $10,190 of credit card debt which is currently at 9.99%.

Using the DebtSmart Loan Calculator…
Time to repay $10,190 at 9.99% with $94.37 per month: 276.48 months which is 23 years. Therefore the mortgage will be paid off first.

Using the DebtSmart Loan Calculator…
The balance remaining on the credit card after 21 years is: $2,082.19

Since the mortgage is paid off, you can use the entire $647.57 to repay the credit card debt balance.

Using the DebtSmart Loan Calculator…
Time to repay $2,082.19 at 9.99% using $647.57 per month: 3.36 months

Total time paying $647.57 is 21 years, 3.36 months or 255.36 months.

CONCLUSION:
The comparison is based on the fact that an apples-to-apples comparison dictates that you pay the same amount per month to both cases and then figure out which case is best and how much is saved.

When you refinance at 4.85% you pay $647.57 for 160.2 months.

With the 8.25% mortgage and 9.99% credit card rate you would have to pay $647.57 for 255.36 months.

Therefore, the amount saved is the difference in payoff time multiplied by the monthly payment:

$647.57 x (255.36-160.2) = $61,622.76 (TOTAL SAVINGS)

That is the amount you could save, instead of spend, by doing the refinance at 4.85%.

You may be interested in reading more on what I think about biweekly mortgages in my article, Biweekly mortgage may be rip-off.

Shawn M.