Photo: Robert Trachtenberg
Q: My husband just discovered that I took out a $125,000 unsecured loan (at 8.29 percent interest) without his knowledge—and needless to say, he's furious. I've suggested that we either refinance our home or take out a home equity loan to pay off this debt. My husband thinks it's a waste to refinance, considering we would have to pay closing costs. The home equity loan would require no closing costs, and would carry a 7 percent interest rate. What do you recommend?
A: Your husband "discovered" that you took out this loan—meaning you never told him about it? Your biggest debt is the one you owe your husband, who is a saint for sticking by you. It will take work to regain his trust—you will need to hold yourself accountable from now on and observe one of my first rules of finance: Truth creates money, but lies destroy it.
I'm generally not in favor of exchanging unsecured debt for debt tied to your home, because if you have trouble keeping up with the higher mortgage payments, you could lose your home. But I'm going to make an exception here. The fact that you were able to take out such a large personal loan—and that you're eligible to refinance—tells me you have ample resources and plenty of equity in your home. If those assumptions are correct, and if your intention is to stay in the home for at least five years, it may make sense to refinance if you can qualify for a fixed interest rate of around 5 percent. (The home equity loan at 7 percent doesn't give you enough of a rate reduction over the personal loan to be worth it.) As I write this, the average 30-year fixed-rate loan is right around 4.5 percent. Paying off that $125,000 through a 4.5 to 5 percent fixed-rate mortgage in which the interest is tax deductible is a far better deal than paying 8.29 percent on a personal loan in which the interest is not tax deductible.
But you need to wake up and acknowledge how serious this is. Your marriage is already on the line, and with this move, your home will be as well.
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From the February 2011 issue of O, The Oprah Magazine