One of the pieces of advice you hear over and over in the financial industry is, to not borrow money against your home for basically any reason.
There are some people who suggest that it’s OK to take out a home equity line of credit (or HELOC) so you can invest the funds, or make improvements on your home. But to pay off consumer debt? That’s a no-no. I always thought this was a wise piece of advice, but recently decided not follow it.
My husband and I bought our first home two years ago, when the market was incredibly low, for $172,000 at a 3.5% interest rate. A smart financial move on our part.
We also financed a brand new KIA SUV for about $31,000 at a 1.99% interest rate, after trading a car we were already upside down on. Perhaps not a smart financial move. Fast forward two years, and we’re looking into refinancing our home because we wanted to drop the $2,200 additional annual private mortgage insurance (or PMI) cost.
Our broker friend encouraged us to refinance our 30-year fixed mortgage into a 15-year fixed loan, if we could afford it. After some number crunching, we discovered that we could refinance our home and be able to pay off the KIA SUV in the process. In addition, we would be able to save a little extra money each month. Also, our home was appraised for $280,000, which was quite a bit more than what we paid for it.
Will Our Refinance Save Us Money?
After coming to this realization, we decided to go for it, and refinance our mortgage loan. Of course, when you cut your loan repayment time in half (from a 30-year fixed loan to a 15-year fixed one), you end up paying higher monthly payments. However, since rolled our car loan into the mix, we no longer had that hefty payment each month.
Here’s how the monthly numbers changed:
|Loan Type||Before Refinance||After Refinance|
Not only are we paying $150 less each month after our refinance, but we’re also on track to pay off our home about 12-13 years sooner –the new mortgage price reflects the added money taken out to pay off the home quicker. We are also saving $2,200 a year because we eliminated the PMI cost, so that’s a nice added benefit.
Won’t the Car Cost More in the End?
One thought I had while increasing our mortgage to pay off the SUV, was that we’ll end up taking a longer time to pay for the car, and subsequently end up paying more for it. This is because our car loan got hitched to a longer loan with a larger interest rate.
However, I knew we wouldn’t have been able to afford to refinance into a 15-year loan with the additional $500 auto loan payment due each month. For us, the trade-off was worth it. We may end up paying more for the car, but ultimately we will pay less for the mortgage.
Should You Refinance Your Home to Pay Off Debt?
I think in our case, it was a smart move. We were extremely lucky to have gotten our home at such a great price, that it’s now worth over $100,000 more than what we paid for it. Even if the market shifts down again, I’m still confident that we could sell our home for more than our mortgage refinance, which is always a relief.
Also, the move to pay off the car was orchestrated to pay off debt for good and to move our life to debt-free living. We aren’t going to add another car loan to our load, and hopefully never will for the rest of our lives. With the extra $150 savings, we have been attacking the rest of our debt (about $5K worth). And within a few months, the only debt we’ll have (and hope to ever have) is our mortgage.
I definitely think borrowing against your home can be wise if used to pay off debt and accelerate a debt-free lifestyle. Borrowing against your mortgage to pay for luxury items or vacations, however, is not a good idea. You don’t want to use the equity in your home to pay for consumables, or things that don’t bring value to the table.
Do you think it was smart for us to refinance our mortgage to pay off debt? Would you have done the same, or did I make a dumb financial move?