Debt Consolidation Mortgage, Refinancing Can Help Shore Up Finances

Eddie and Meg work hard to manage their money.

With sizable salaries, good savings, an investment property and an 18-month-old child, the Middlesex County, N.J., couple wants to make sure they’re doing the best with their resources.

“Our main goals are a debt consolidation mortgage to reduce costs, college planning and retirement,” Eddie, 34, said.

The couple has stashed away $214,504 in 401(k) plans, $54,736 in IRAs, $180,151 in brokerage accounts, a $35,000 COD, $25,000 in savings and $4,000 in checking. They also own a rental property from which they receive income, and their debt consists of two home mortgages.

The Newark Star-Ledger asked Mark Reddy, a certified financial planner, to help the couple assess their finances.

“The financial future for this family is promising for two significant reasons,” he said. “They live well below their annual incomes, and with the annual savings, they started contributing significantly to their retirement accounts when they were young. These two financial habits will serve them well over the long run.”

The first issue to tackle is mort gage debt. The couple has a $230,000 New Jersey mortgage on their home, a 30-year, fixed-rate loan with a rate of 5.875 percent. On the investment property, which was purchased in January 2006, there’s a $291,000 five-year ARM at 6.5 percent.

They have $79,000 of equity in the rental property, but the property has a negative cash flow of $977 per month, which the couple hopes to sell in 5-6 years. Reddy says the housing market in New Jersey is finally slowing after years of big appreciation, so selling the property a few years down the road may not produce the profit the couple was hoping for.

In fact, if mortgage rates continue to decrease further, there may be an even better opportunity for the couple -to reduce monthly costs by refinancing.

Reddy says the option of paying off the mortgage on the rental through mortgage refinancing on the primary home, then combining the two loans into one mortgage, may not reduce the monthly cost by much. Also, there are restrictions on the tax deductibility of home equity interest of $100,000 or more of home equity debt.

“I am generally opposed to negative cash-flow properties, but if they are confident in the future prospects of the property, I would advise to sit tight for now and sell when they feel the time is right,” Reddy says.