You have a car loan that currently sits at 7% interest, you have credit card debt that currently sits at 14.99%, and you have the option of rolling both of those loans into a new loan after you refinance your home… should you do it? Probably not and there are two good reasons and one pretty good reason why.
Good Reason #1: You Pay More Interest
Usually car loans are for five years so when you’re paying 7% interest each year, you’re really only paying it for five years so the total interest cost is relatively low. When you refinance a loan, say to a 30 year fixed or some sort of low rate ARM, you’re now paying for the lower rate, 6% or whatever, for thirty years. Five years at 7% on $10,000 means you’ll pay $1,880.60 in interest. Thirty years at 6% on $10,000 means you’ll pay $11,585.60 (you may be able to deduct it from your taxes so the interest really is three-fourths of that, or $8688.75).
Good Reason #2: If You Miss Payments, You Lose Your House
One of the many fallout stories with the mortgage industry is that of folks who refinanced in order to pay down their debt, in this case it was car and medical bills (so I can understand, there isn’t a choice at least with medical bills), and then found themselves unable to keep up with the payments. If you have a car loan and you can’t make payments, they take the car and you ride the bus. If it’s a credit card debt, it just goes into collections and you won’t get another card. If you have a mortgage payment and you can’t make payments, they foreclose on you and you have to find someplace else to live!
Pretty Good Reason #3: The Pressure To Pay Is Good For You
This isn’t a financial reason, it’s a psychological reason and so that’s why I say it’s only a “pretty good” reason. With a higher interest rate, you feel the pressure of paying it off and so you’re more likely to pay it off. If you roll it into a large mortgage payment, well you no longer feel the pressure and you’re likely to keep charging (if it’s a credit card).