In yesterdays post about Home Refinancing – Part 1 – Upside I touched upon some of the positives of refinancing your mortgage and collaborating it with your debt, in order to eliminate interest and free up immediate cash flow.  I also identified the upside of owning a home versus renting and the added benefit of self financing you have available through the equity of your home. A few months back I talked about the positives on owning versus renting and why I believe its a better option; Owning a Home versus Renting. During yesterdays post, I also mentioned that Home Refinancing is a double edged sword. Yes you can free up cashflow and eliminate interest, but your debt still exists. The only way to actually get rid of debt, is to pay it off. Adding it into the equity of your home, you are only hiding your debt and the problem still exists.

Quick and dirty example on Home Refinancing

The Numbers

Home Value: $240,000

Mortgage: $174,000 balance, 20 years left, 3.4% interest rate = $998 Monthly Payment 

Credit Card Debt: $3,500 balance, 11.9% interest rate = $30 Monthly Payment

Vehicle Loan: $26,000 balance, 8% interest rate = $440 Monthly Payment (Tax Included)

Department Store Charge Cards: $2,000 balance, 29% interest rate = $215 Monthly Payment

Total debt obligation of $205,500 and total monthly payments of $1,683

By refinancing, they can take out $31,500 of equity from their house to pay out the vehicle loan, credit card and the department store charge card. This increases the mortgage from $174,000 to $205,500.

However, that entire amount is now being charged 3.4% interest and amortized over 20 years.  The new mortgage payment is $1,178. No more credit card, car payment or store charge card.

Old Total Monthly Payment = $1,683

New Total Monthly Payment = $1,178

$505.00 Saved Per Month

Hide & Go Seek

By combining all your debt into one payment, yes you are saving cash upfront and the extra interest. Like in the above example, you are saving $505.00 monthly. One catch though, is that you really have not paid off your debt, but in actuality only hid it into your mortgage through Home Refinancing. The problem still exists, it was only temporarily dealt with.

Relapsing

I like to call this relapse, because it essentially is that. Like being a drug addict, you are only good if you deal with your addiction permanently and not go back to it. Same principle goes with money. Now that you’ve saved your self tons of interest and have extra cash every month, its easy to forget about your refinancing and get back out there to shop again. Relapsing back to your old ways of shopping and living in more debt is far too easy. Key to it, is to use the extra cash flow towards putting into your mortgage (debt repayment) and stashing some away into savings. Any other option is foolish and only spells double trouble down the road.

How do you feel about hiding debt into the mortgage?

FOX