daughter, who is 31 and single, has $15,000 in credit card debt that
would we like to help her get out from under. This debt consists of
two different maxed out credit card accounts that are both charging
very high interest rates, as well as late charges and over the limit
fees. We are considering refinancing our mortgage, which currently
has a balance of $47,000 and a 5.75% rate. We will continue to make
the same payments we're making now, and she will make the additional
amount needed to pay off the loan in about 6 years. That way she
would not have any debt showing up under her name, and we would be
able to take the additional interest off as a tax deduction. Even
though there would be closing costs involved on a refinance, I still
feel that those charges would be less than the interest on the
credit cards over the long term. Is this a good solution or not? By
the way, we have had several lengthy discussions with her about how
to manage her finances and also purchased your "How to be more
credit card and debt smart" manual for her.
Thanks for writing and getting my
Great question especially considering
that last issue's survey was about lending to family. The good news
is that it seems, from those results, that lending to family works
out better than lending to friends. Also, I'd like to speculate that
lending to your children, in general, could work out well. The last
thing anyone would want is a damaged relationship over money.
I believe that your plan is a good
idea. And I believe this for many reasons. First of all, you are
going to be saving money by refinancing and you're going to be saving
money for your daughter by reducing her interest rates. Second,
because the rate reduction is in the form of a mortgage you get that
tax benefit. Third, once her loans are paid off by the refinance,
they'll be off of your daughter's credit report.
Now let's crunch some numbers. If she's going to be paying this loan
back in exactly six years, then a principal of $15,000 at 5.75%
requires a monthly payment of $246.83. However, if you really wanted
to work out the numbers there are still other cost
considerations--closing costs for example.
If you were going to refinance anyway,
then you would have paid all the costs that involve the property like legal, title work,
loan applications, etc. regardless of lending to
your daughter. However, if there are points involved then your
daughter's portions would contribute to increasing that cost. If
there is a charge of 2% on a $15,000 mortgage, then your daughter's portion of that charge
is $300 ($15,000 *.02 =$300).
On the other side of charges, you
will be receiving a tax refund based on the loan and extra savings
because of her additional loan. You could refund that amount to her
by simply reducing the rate of the loan based on your tax bracket.
instance, if you are in the 15% tax bracket, then subtract .15 (15%)
from 1.00 (100%), which is .85, then multiply that number by your
current APR to find your new APR (5.75 * .85 = 4.89). This gives you
the new interest rate of 4.89%. This reducing in interest
represents the amount you'd be receiving as a refund based on your
The 6-year, monthly payment of
$15,000 at 4.89% is $240.81.
Now that your daughter will have no
outstanding credit card balances, she'll need to be careful when
spending. I suggest only using her credit for emergencies and
budgeted spending. Managing credit overlaps managing spending.
Hope that helps!
Please let me know how it all works