My first mortgage balance is $190k at 4%pa. I have a home equity line of $170k that I have fully utilized. I am also a $30k credit card debt.

Should I refinance my home equity loan to consolidate my credit card debt?

Obviously it is advantageous for you to consolidate your credit card debt because:
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(a) you will save interest because you will be using the cheaper home equity loan to replace your more expensive credit card loan, and
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(b) having your credit card debt paid off will result in a lower credit card utilization rate which in turn will improve your credit score.

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Financing option
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How are you going to raise the $30k to clear your credit card debt?
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(1) One option is to increase your home equity line by $30k, assuming that you still have available home equity to do so. This will bring your total home equity debt up to $200k.
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(2) The other option is to ask your first mortgage lender to lend you another $200k that you will then use to pay off both your home equity loan and credit card debt. This is advantageous because first mortgage is usually cheaper than second home loan such as your home equity loan.

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Points to note
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(A) Your current situation has a tax disadvantage here. While you can deduct your home equity loan interest for tax purposes, your eligible home equity loan is limited to a maximum of $100k only. The interest you pay on the remaining $70k of your home equity loan is not eligible for tax deduction. Financing option (1) stated above will not increase your tax deduction for the loan interest.
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If you choose financing option (2) to borrow the $200k (ie $170k + $30k) from your first mortgage lender, you will increase your interest savings as mortgage interest rates are lower than home equity loan rates. Of this $200k new first mortgage, interest on $100k is still eligible for tax deduction.
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It does not matter what the loan is called, either first mortgage or home equity loan. For the purposes of tax deduction for mortgage interest, as long as the loan secured on your home is not used for buying or improving your home, the loan amount — whose interest is eligible for tax deduction — is limited to a maximum of $100k only.

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(B) You should ascertain the appraised value of your home. If your total borrowings exceed 80% of your home’s appraised value, you will have to buy private mortgage insurance (PMI) to protect your lender against your default. PMI will increase your loan costs. Your total borrowings will be $390k (ie $190k + $170k + $30k new loan), and so your home’s appraised value has to be at least $488k to avoid having to pay PMI ($390k � $488k x 100% = 80%).

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The bottom line is that you must work out the numbers (eg the interest charges, closing costs, monthly repayment amount, total loan interest over the loan period, APR, etc) under each possible option to determine the best choice before you make your decision.
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Tags: consolidate credit card debts, home equity loan and tax deduction, improve credit score, PMI

[tag]Home equity loan[/tag]

You should bear in mind that you will still be in debt: you will be in a home equity loan debt although you will be free of your credit card debt.
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If you really can’t afford the monthly payment for your $10,000 [tag]credit card debt[/tag], getting a home equity loan to replace it may be justifiable because there are some advantages:
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(a) home equity loan interest rates are lower than credit card interest rates. So you will be using a cheaper debt (home equity loan) to retire a more expensive debt (credit card debt)
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(b) home equity loan interest rates are fixed, and therefore you are free from the risk of unexpected interest rate hike. The monthly repayment instalment is also fixed, thus making it easier for you to plan your cash flows
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(c) the longer the home equity loan period, the lower the monthly repayment instalment. Therefore you can choose a loan period that gives you a low monthly repayment instalment that you are comfortable with. But the trade-off is that the longer the period, the more cumulative loan interest you will pay.
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(d) the interest you pay on the home equity loan is [tag]tax deductible[/tag], whereas your credit card interest is not.
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But do you have the cash to pay for the costs of taking out a home equity loan? You should find a trustworthy lender to determine exactly how much cash you have to cough up to cover the costs of taking out the home equity loan.

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Reducing your credit card limit

If you do replace your credit card debt with a home equity loan, don’t start spending on your credit card again without discipline to build up another beyond-your-means credit card debt. Don’t let the home equity loan make you feel rich.
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Cutting up your credit card and paying for everything by cash is the best discipline, but it may not be practical for you. If you find it difficult to muster self-discipline to curb your credit card spending, you may have your credit card limit reduced to prevent you from overspending. But the resultant drawback is that this will affect your [tag]credit score[/tag] negatively.
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The [tag]FICO[/tag] formula, created by Fair Isaac Corp., likes a nice, wide gap between any balances and the limits on your credit cards. In other words, it likes a low utilization rate on your credit card limits. Lowering your credit limit would reduce that gap and could have a negative impact on your score. (Credit scores, in case you don’t know, are three-digit numbers that lenders use to help gauge your creditworthiness. The FICO is the leading credit score system.)
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For example, if your credit card limit is $8,000 and your credit card debt is $2,000, your utilization rate is 25% (2000 � 8000 � 100% = 25%). If you reduce your credit card limit to $4,000 and your credit card debt remains at $2,000, your utilization rate rises to 50% (2000 � 4000 � 100% = 50%), ie the gap is reduced. This high ratio may be interpreted to mean that you are living closer to the edge.
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If your credit scores are good, you needn’t worry about lenders balking because you have “too much” available credit. If your scores aren’t good, you don’t want to imperil them further by shutting down or reducing your credit lines.
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You have two other possible alternatives to raise the cash you need to pay off your credit card debt, viz. life insurance loan and personal loan.

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[tag]Life insurance loan[/tag]

If you have life insurance policies, you may borrow against the accumulated cash value at relatively low interest rates. Essentially, you are borrowing from your own savings. Interest rates may be fixed or variable depending on the policy.
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Life insurance loans can be a convenient way to borrow money, especially if the interest rate is low. These loans do not have to be repaid, but keep in mind that the outstanding balance will be deducted from the death benefit the beneficiary will receive when you die. It is important that you at least pay the interest as it comes due, since interest will continue to compound on the interest owed on the loan.
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CAUTION!: If you use the cash value in your insurance policy to pay the interest on a life insurance loan, you may use up all of your cash value, which can cause your policy to lapse.

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[tag]Personal loan[/tag]

There are many different types of personal loans (or [tag]consumer loans[/tag]) that you may be able to get if you are unable to take advantage of a home equity loan or a life insurance loan discussed above. They may be secured or unsecured.
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You may consider taking an [tag]unsecured personal loan[/tag]. Since you are a home owner, in the eyes of the lender you are solvent, ie your home ownership implies that you have the ability to meet your financial obligations on time.
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Your home ownership also implies that in case you cannot afford the monthly payments and the lender has to resort to legal means to recover his money, there are more probabilities he will be able to get enough money from your assets to recover the amount owed and any legal fees he might incur.
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You will be charged a fixed interest rate on your unsecured personal loan. Your monthly repayment instalments will also be fixed. You may choose a loan period that gives you a low monthly repayment intalment that you are comfortable with. Of course the longer the loan period, the lower the monthly repayment instalment, but you will pay more interest in total.
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Personal loans are the least favorable way to borrow money, since they typically carry very high interest rates.
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The interest charges on personal loans are not tax deductible.

Tags: consumer-loans, credit-card-debt, credit-score, fico, home-equity-loan, life-insurance-loan, Personal loan, tax-deductible, unsecured-personal-loan