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Scott Bilker is the founder of DebtSmart.com and the author of Talk Your Way Out of Credit Card Debt, Credit Card and Debt Management, and How to be more Credit Card and Debt Smart. Send your questions about money, credit, loans, mortgages, or debt, to him at: Scott Bilker, PO Box 563, Barnegat, NJ 08005-0563 or online at: http://www.debtsmart.com/askscott

Scott,

Our daughter, who is 31 and single, has $15,000 in credit card debt that we would like to help her get out from under. This debt consists of two different maxed-out credit card accounts that are both charging very high interest rates, as well as late charges and over the limit fees. We are considering refinancing our mortgage, which currently has a balance of $47,000 and a 5.75 percent rate. We will continue to make the same payments we're making now, and she will make the additional amount needed to pay off the loan in about six years. That way she would not have any debt showing up under her name, and we would be able to take the additional interest off as a tax deduction. Even though there would be closing costs involved on a refinance, I still feel that those charges would be less than the interest on the credit cards over the long term. Is this a good solution or not? By the way, we have had several lengthy discussions with her about how to manage her finances and also purchased your "How to be more Credit Card and Debt Smart" manual for her.

Anna

Great question, especially considering that the last DebtSmart® survey was about lending to family. The good news is that, judging from those results, lending to family works out better than lending to friends. Also, I'd like to speculate that lending to your children, in general, could work out well. The last thing anyone would want is a damaged relationship over money.

I believe that your plan is a good idea. And I believe this for many reasons. First of all, you are going to be saving money by refinancing, and you're going to be saving money for your daughter by reducing her interest rates. Second, because the rate reduction is in the form of a mortgage, you will receive a tax benefit. Third, once her loans are paid off by the refinance, they'll be off of your daughter's credit report.

Now let's crunch some numbers. If she's going to be paying this loan back in exactly six years, then a principal of $15,000 at 5.75 percent requires a monthly payment of $246.83. However, if you really wanted to work out the numbers there are still other cost considerations--closing costs for example.

If you were going to refinance anyway, then you would have paid all the costs that involve the property like legal, title work, loan applications, etc. regardless of lending to your daughter. However, if there are points involved then your daughter's portions would contribute to increasing that cost. If there is a charge of 2 percent on a $15,000 mortgage, then your daughter's portion of that charge is $300 ($15,000 x 0.02 =$300).

On the other side of charges, you will be receiving a tax refund based on the loan and extra savings because of her additional loan. You could refund that amount to her by simply reducing the rate of the loan based on your tax bracket.

For instance, if you are in the 15 percent tax bracket, then subtract 0.15 (15 percent) from 1.00 (100 percent), which is 0.85, then multiply that number by your current APR to find your new APR (5.75 x 0.85 = 4.89). This gives you the new interest rate of 4.89 percent. This reduction in interest represents the amount you'd be receiving as a refund based on your daughter's loan.

The six-year, monthly payment of $15,000 at 4.89 percent is $240.81.

Lastly, now that your daughter will have no outstanding credit card balances, she'll need to be careful when spending. I suggest she use her credit for emergencies and budgeted spending. Managing credit overlaps managing spending.

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Reader comments about this article:

"I liked the suggestions on refinancing. However, I think that the fact that her parents are willing to put themselves and their home on the line for their child is a decision that may haunt them. They need to find out if their daughter is COMMITTED to staying out of debt and making smart financial decisions. They can do all of the right things forever and ever, and if their daughter continues to make stupid financial decisions, it will all have been for nothing. Perhaps they should put their daughter into counseling to find out just what psychological reasons there are for all of her spending. That would be money well-spent. The article itself was great. Love it! Please keep it up!" 
--Lucy Diaz-Andino

"Her parents should tell her to get rid of her credit cards. What good is her parents helping her if she can do it all again." 
--Scott Morey

"I dislike the idea of bailing the daughter out of her debt and the parents taking it on in mortgage form. At her age it is obvious that she isn't founded in management principles and these don't come easily at that age. The fact that they have to do the mortgage deal indicates they don't have any liquid resources to fund this thing. Bailing the daughter without her demonstrating she is teachable will likely result in another accumulation of debt, and the cycle goes on. Don't be so preoccupied with daughter's credit rating, preserve the rating of the parents and let the daughter assume some responsibility and help her with a plan to clean up her own debt." 
--Jim

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