It seems like only yesterday, mortgage brokers were encouraging their clients to use the equity in their homes to pay off the high balances on their credit cards.
In all truth, that’s not a bad idea. First off, mortgage interest is deductible off of your federal income taxes, while credit card interest is not. Credit cards are revolving debts as opposed to *most* mortgages’ fixed rates. In fact, paying the minimum owed on a $6000 credit card debt at 19.99% interest rate will take longer to pay off than a $200,000 balance on a traditional fixed mortgage at 8% APR. And especially with the new higher monthly minimums, a mortgage payment can be significantly smaller than paying even the minimums on several credit cards. By the way, don’t let your broker reset your mortgage every time you refinance (Yeah, I hear you – this is the last time… unfortunately, the statistics don’t agree with you).
But there may be a strange reversal coming – one that’s already happening in Australia.
Australia’s # 1 newspaper, the Sunday Herald Sun, is reporting that thousands of families are paying their rising adjustable rate mortgage payments with credit cards – to the tune of $160-grand, in one family’s case. In fact, the Australian Reserve Bank says that credit card holders there took an estimated $1.035 BILLION in cash advances in January 2007 alone. And that’s not even taking into account 20%-plus interest rates on the cash advances. And still foreclosures have doubled in the last four years.
Add to that, the fact that, despite the stiffer bankruptcy laws and increases in the minimum amounts owed each month, and credit card rates rising past 30% in more cases than I care to think about… According to the Federal Reserve, United States credit card debt has blossomed an additional $58-BILLION since the payment adjustments went into effect. And now families who bought more homes than they could really afford or even those who thought they were getting better deals on their current mortgages thanks to the housing boom are finding themselves with rates adjusting up and equity levels dropping dramatically, leaving them no refinance parachute other than going deeper into the hole their banks already dug for them.