More alternatives to loan consolidation

Deseret News (Salt Lake City), Apr 29, 2007 by Greg Kratz Deseret Morning News

Last week I shared some criticism I received about a recent column on loan consolidation.

But really, it was all about my shortcomings as a columnist.

This week's reader responses to that April 1 column also took issue with the advice I passed along, but with more specific suggestions.

As a reminder, the April 1 piece dealt with a reader who wished to remain anonymous. She said she and her husband had a first and second mortgage and a pile of credit card debt. She wanted to know whether they should pay off their existing debts as they stand or try to save on interest by consolidating loans. The expert I contacted suggested that they consolidate into one new mortgage and pay it off over eight years, saving $10,492 in interest.

A reader named Brian suggested (as did last week's e-mailer) that I must have been making an April Fools' joke. He wrote that he just turned 62, and he feels there is no need to pay off any mortgage principal.

"(Maybe) there is an emotional, psychological or some other sappy rubbishy reason, but there is no financial reason to pay off principal," Brian wrote. "And why amortize over 15 years? At 75 (you're going to) say, 'Wheow! I paid off my mortgage! Yee-hah! What a hero I be.'

"Why not 30 years? You can be secure at your (90th) birthday in the knowledge that your house is paid off? Nonsense. The only thing you're worried about at that age is whether your bladder and bowel are secure."

Brian suggests that our anonymous e-mailer get an interest-only loan, noting that at 6.5 percent it would cost her and her husband about $1,121 a month.

"(Forget about) looking at total interest paid for all these screwy alternatives," he wrote. "You just can't beat this interest- only deal. They could even get megabucks cash out if they want to do a little self-hedging against rising interest. But no matter -- they have a huge advantage."

That's an interesting idea, Brian, although it sounds a bit risky. Our anonymous e-mailer may not have the stomach for such a plan. Perhaps she feels that paying off her mortgage would give her a sense of financial peace as she faces retirement. I don't think that can be ignored.

I also received a note from Michele, who read the April 1 column while visiting Utah from California.

Michele wrote that she and her husband are 60 and 62, respectively. They have a first mortgage for $70,000 at 5.125 percent. They owe another $80,000, with $10,000 on a home equity line of credit, $35,000 on a credit card with a 2.99 percent interest rate and $35,000 on credit cards with 0 percent interest rates.

"The 2.99 percent and 0 percent offers are better than any tax credit for first and second mortgages," Michele wrote. "Having $250,000 available on a (home equity line of credit) makes us look great on debt ratios on credit card offers (we receive many). When one expires, we diligently pay it off and transfer to another."

She wrote that they never miss a payment and pay close attention to fees and pay-off dates. As a result, their credit score is 840.

"Wow! I was amazed to learn this," Michele wrote.

Again, this is an idea that comes down to risk tolerance and a knowledge of your personal organizational abilities. If you stay on top of things and continue to shift those balances to new credit cards offering 0 percent rates, I can see how this would work. But I feel certain that many people would not be so diligent and would end up paying exorbitant interest rates on debt after introductory rates ended.

As I've written before, the point of all of this is that one size does not fit all when it comes to financial advice. Keep your e- mails and letters coming, and I will try to find experts to give you a good starting point at solving your financial problems. But please explore all of your options before making a decision. After all, it's your money!

I would be interested to hear your take on the ideas put forward by Brian and Michele this week. Or, if you have a different financial question, please send it to gkratz@desnews.com or to the Deseret Morning News, P.O. Box 1257, Salt Lake City, UT 84110.

E-mail: gkratz@desnews.com