Fixed-rate mortgage loans are low, but is no-interest credit card debt better?
Q. I realize mortgage interest rates are at historic lows, but I just got a come-on for a new credit card with 0% interest for more than a year on transferred balances. Should I transfer all or part of the balance of my mortgage ($22,500) to one of these cards? The one I just got in the mail offers cash-back rewards.
–Chicago
A. In prior years, some banks would encourage homeowners to pay off mortgages with credit cards they issued to get rebates or other rewards, but they haven’t done this since the housing bubble burst. The 0% interest rates offered now are really teasers to try to get consumers to transfer their balances from competitor’s high-rate credit cards. Letting borrowers replace low-interest fixed mortgages—or even variable-rate home equity lines of credit—with higher interest, compounding credit card debt is too risky in our still-shaky economy. A borrower without the resources to pay off the balance in full each month could quickly wind up with a ballooning debt and no means to repay it. Eventually, the lender would be stuck with another foreclosure to maintain and sell.
That said, if you have the excellent credit and paid-off credit card balance necessary to qualify for a 0% rate, it is possible to transfer money from your card into your checking account, and then pay the mortgage out of those funds. Or you could use a third-party company that charges your mortgage payment to your credit card each month (thus preserving any rebates or rewards that are only given to new purchases) in exchange for a fee.
But I wouldn’t recommend these strategies unless you are disciplined about paying your bill in full each month. You also should have the means to pay off or refinance the loan completely before the 0% rate expires, even if you lost your job, had a health-care crisis or experienced some other financial emergency.
There are two upsides to paying with plastic: First, if you borrow enough to pay off the balance of your mortgage, all of the money goes towards principal. And second, by borrowing the money from your credit-card company to pay off your mortgage, you free up your savings for other potentially lucrative investments.
But there are also some serious potential pitfalls. Putting a large amount of money on your credit card can hurt your credit. Many credit card companies only give cash back and other incentives for new purchases, not transferred balances. Plus, there are often hefty fees for transferring balances or taking cash advances that cancel out any benefit you get for the 0% interest rate. Worse, if you skip a payment, the card issuer may have the right to raise the interest rates from zero to the double-digits. So it’s important to read the card’s fine print before you make a commitment.
The bottom line: Don’t take this “free” money unless you don’t really need it. Otherwise the risk—potentially losing your home—is not worth a few rebates and rewards.
—Email fletcher.june@gmail.com
© 2013 The Peral Group