Topic Added February 21st, 2006 – Print This Story
To start, replacing $20,000 in rotating debt with $20,000 in mortgage debt is not taking the debt away, it is just making it a different kind of debt. You will be in debt longer, however, if you replace revolving credit debt with an interest only loan. Any relief felt in the monthly bills by paying down that credit debt will be quickly lost if the credit line is used again, hence making it prudent to close all credit lines if you refinance. A fixed rate mortgage has a self-amortizing feature, which means that the monthly payment contains interest and a contribution to principal that will pay off your loan in a given amount of time.
The interest only mortgage pays just that, interest only. No money is being put to the principal amount. While the loan may allow for a smaller monthly payment on a larger chunk of money, it may lead to negative amortization before the end of the loan, or the end of the initial fixed period of the loan. Also, by refinancing a mortgage, the borrower may end up paying more in closing costs and new interest than they would be saving over the long run. The monthly amount paid may be less, as well and the interest paid, but the principal would remain the same. Normally, a second mortgage, line of credit or equity loan is a better idea, due to the fixed rate and the set payoff. Principal and interest are factored into the loan, and the amount saved can be easily compared to your credit debt.
Topic Added February 21st, 2006 – Print This Story