I read the article and was just floored. These people don’t understand carrying costs of the debt. Borrow at 8% or more and stick in a CD yielding maybe 5%.. real smart. So you have $60K or so costing you an additional 3% per year when you were already in trouble?
How about: Earlier this year, J. Hwang of Fort Lee, N.J., tried to refinance the 7% rate he was paying on his mortgage but couldn’t qualify because his bank was now requiring him to hold more equity in his home. Instead, he decided to take advantage of some credit cards’ 0% balance-transfer offers and borrowed roughly $45,000 to pay down the balance on his home-equity line of credit.
Mr. Hwang’s strategy: Since he won’t have to pay any interest on the credit cards for about a year, he figures he will be able to save roughly $2,000 that he would have otherwise had to pay on his home-equity line of credit. Instead, he plans to use the savings to pay down the principal on his mortgage. “I didn’t want to give my bank another penny for interest,” says the 30-year-old health-care worker.
Ok.. can’t refi the 7% so transfer to a credit card, which may be 0% for 1 year (teaser rate) and then is somewhere north of 12% afterwards. Interest on the HELOC is tax deductable, but the credit card interest isn’t. What happens when the cards go off their teaser rates?
Add that to using the savings from one year of interest to pay down on the mortgage (whose interest is also tax deductible and at a lower rate). Again, what happens in the next year? This guy really “screwed the pooch”. He will probably have to BK in a year.
As for the one who pulled 60K in equity for breathing room?.. they are now having to deal with the carrying costs, which will eat them alive.
The general rule in debt, to get out of debt, is to pay off more expensive money with cheaper money. Not the other way around.
