Freedom 125 2nd mortgage loan from ditech.com?
I'm thinking of getting a second mortgage loan from ditech.com called
Freedom 125 (borrow up to 125% the value of your home less the current
balance on your first mortgage) to consolidate my credit card debts. I
looked into it because of its possible tax advantages even though my credit
cards already carry very low rates: 9.9% to 10.5%. ditech's rate is very
high, 15.25%, but there is ZERO closing cost. It can be bought down to
14.75% for $395.
The loan agent was trying to convince me that their 15.25% is still a better
deal than my 10% credit card rates because of 1) interest on 2nd mortgage is
tax deductible and 2) their interest is simple while credit cards' interests
are compounded, so on a 10% APR credit card, I would be paying close to or
even more than 15% per year.
I also found a lower interest rate from another company, 12%, but the
closing costs total $2500.
You know your own financial discipline best, but I would not advise
anyone to change credit-card debt for a mortgage because you then
have the risk of losing your home. As I say, you know yourself best:
if you truly have the discipline to pay it off on time then it might
be worth thinking about. Of course if you suddenly become unemployed
or have catastrophic medical bills you're screwed.
That's bull. With both a mortgage and a credit card, the minimum
payment is enough to cover all the accrued interest plus some
principal. The only way "compound interest" becomes an issue is if
you don't pay enough to cover the accrued interest, so some of it
gets added to the principal. But I assume you're not in that
situation.
If you're financing a quarter of a million dollars, that's not bad.
If you're financing $10,000, it bites the big one. Naturally you
don't want to tell us how much you're financing, but compare it to
closing costs as a percentage. Also check the tax treatment of
closing costs with a competent tax adviser: even if the second
mortgage interest is deductible, the closing costs or a portion of
them may not be.
Bottom line: Right now if you have to default on your credit cards
you probably keep your house. If you have a second mortgage and have
to default on that, through an unforeseen change in your
circumstances, you will almost certainly lose your house. You decide
if you're willing to assume that risk for what seems like a small
saving in money.