7/25/2005

Advice from Nashville's leading Financial Aid Advisor Dave Ramsey

 
Dave Says
By Dave Ramsey
Author of:
Financial Peace and
The Total Money Makeover

"Refinance house to fix roof?"

Dear Dave,

I’m new to your program and need some advice. My wife and I are planning to refinance our house to get $4,000 for needed roof repairs. We are in the military and have recently relocated from Europe. The move ate up most of our savings, so we can’t pay cash for this repair. Plus, I’ve been told that I can refinance now at a lower interest rate.

Would it be smart for us to add all of our credit card debt – about $8,000 – into that refinance as well and just get rid of all of that debt? Our household income is about $35,000 and we also have a car on which we owe about $15,000. 

Ray in Duncan, AZ



Dear Ray,

Rolling all of your credit card debt into the refinance would be smart – with regard to interest. What you’re talking about is a debt consolidation process. I like to call it, debt CONsolidation. The problem with a debt consolidation is that it gives you the feeling that you actually accomplished something to reduce your debt – but you didn’t. You still owe the same amount of money as before. Only now the tennis shoes that you purchased on your credit card have been financed over 15 years.

Since you’re new to my advice, I’ll just tell you how I answer these questions. Keep in mind that I went broke myself years ago, have since then lived by the principles I teach and have counseled thousands of people on finance. So I always answer these questions by telling you what I would do in your situation. 

If I were you I’d get on a written monthly budget, work like a crazy person to make extra cash to pay off these debts and I’d sell my car. I would not add those other debts into my mortgage refinance.

The other scenario is you sell your car and buy a cheap one for cash. You go ahead and roll the credit card debts and the roof repair into your home refinance. The danger to you, in this scenario, is that you don’t change your financial habits. Next time you need a roof or a major home repair, you still won’t have any money to pay cash. And you’re likely to turn to that credit card they’re going to send you in the mail next week as soon as you pay off your existing cards. Then, you’re right back where you are today.

If you choose to take this second option, I’d wait three months before you do the refinance. I’d use that time to sell the car and live on a budget, not adding any new debt to your financial picture. Continue to pay off those credit card debts. This will prove to yourself that you’ve learned your lesson on handling money responsibly. If you don’t permanently learn to live on less than you earn and live on a budget, then consolidating all of this debt into your refinance is simply going to make things worse for you in the long run. However, I still think that the best solution is the first option I suggested – no refinance and take the time to just pay off those debts.

-Dave

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