Q: I want to buy a house while mortgage rates are low, but my dad says I had better clean up my credit card debt first. I owe about $8000 on three cards, with a total limit of $12,000. I make my payments on time, so what's the big deal?
A: The big deal is your credit scores, which are based in part on how much of your available credit you're using. In order to maintain a good-to-excellent credit rating, financial experts suggest keeping your balances to no more than 30% of your available credit lines. In order to qualify for the best available mortgage rates, you'll need credit scores of 740 +. Mortgage lenders also use debt-to-income ratios for determining how much you can borrow; paying down your debt will help with qualifying and getting the amount you need to buy a home.
Q: I'm close to visiting a divorce lawyer. I just found out that my husband owes $20,000 in credit card debt. Now he wants to refinance our mortgage to pay off the debt. Is this a good idea?
A: Refinancing for extra cash for debt consolidation may be worthwhile if you have sufficient home equity, are not planning to move for several years, and can realize significant savings between the APRs on credit card debt and current mortgage rates. A key consideration is what the refinance mortgage costs and how long it will take to break even on closing costs before realizing any savings. Risks of refinancing for debt consolidation include increasing the debt owed against your home, and the possibility of incurring more credit card debt after refinancing. Talking with a non-profit credit counseling service can help with determining your best options.