Variable Rates and Fixed Rates
If all you want to do is eliminate your credit card debt quickly, you need to evaluate who is offering the lowest interest rates in the financial sector and what is the expected amount of time to off the pay the loan? Are there any pre-payment penalties? Will you have the willpower not to use the zero balance cards again? Are originating fees worth the projected monthly savings? If you are comfortable with the answers, consider the following examples of refinancing your existing mortgage with a variable rate:
Consider ING Direct
A typical five-year Adjustable Rate Mortgage may begin at something like 2.875% - You can only refinance up to 80% of your current property value and, even though they ING Direct claims to have lower closing fees than most banks, it will still cost you over $3,000 to finalize the deal.
Most homeowners roll those fees into the mortgage loan rather than having to pay out of pocket, so if you are planning to follow this route, ensure you account for this amount for your total cash-out. Bear in mind that most people won't pay off their mortgage within the first five years, the rates are expected to increase to 3.75% starting on the sixth year, and it can continue to go up annually up to 2 points per year with a maximum increase of 6 percentage points over the life of the loan. What this means to you in the worst case scenario is that you can end with a mortgage rate that is almost 9 percent at some point after the initial period is over.
Consider a Major Bank
For this example we use Bank of America, who offers different rates based on the location of your existing home.
The ARM rates vary from 2.897 to 3.309 for a five-year loan. A fixed 15-year rate varies from 3.5 percent to 4 percent with a set of points and closing fees that must be added to the final amounts in order to get a clear picture. The amount of points and whether you can get the lowest possible rate is highly dependent on your current FICO and credit scores as well as your debt-to-income ratio.
*Note: Major Banks are conveniently located and can make the process almost painless. The downside is that they can sell your loan to various institutions several times over the life of the loan and are notorious for charging high fees.
Consider a Credit Union
Very few credit unions offer ARM rates, for the purpose of this example we will use the average rates for a local credit union. The rate for a 15-year mortgage fluctuates from 3.1 percent to 3.9 percent.
In this case, there are no surprises to affect your financial plan at the end of five years. Another bonus to consider is the fact that the loan stays in place rather than being sold to other banks several times over for the duration of the loan.
In all the above institutions, a home equity loan is below 5 percent at this time, and this may be a better option for you if your current mortgage rate is only a point lower since the closing costs will offset any expected savings.