Watch the Holiday Spending If You Plan to Refinance

December 6, 2012 No Comments »
Watch the Holiday Spending If You Plan to Refinance

Well, believe it or not, the holidays are upon us again. It seems like just yesterday I was cursing the fact that I didn’t have an air conditioner, and now I wish I had a better heater. Go figure.

To compound that, I now need to get out (or stay online) and do my holiday shopping. The good news is that family and friends have to do the same thing for me, assuming they actually bother buying me gifts this year.

Anyway, I got to thinking about a possible problem that can arise from aggressive holiday shopping.

If you spend and spend and spend in the next few weeks, make sure you can actually pay for all your purchases.

Otherwise you’ll rack up credit card debt, which can obviously lead to costly finance charges.

Unintended Consequences

We all know credit card debt is bad; after all, the APR on credit cards is sky-high compared to pretty much every other type of loan, especially mortgages.

So you’ll be wasting away money via outrageous finance charges if you don’t pay off your bad gift giving debt.

But worse are the unintended consequences of carrying said debt.

Let’s assume you’ve got a “great plan” to tidy up your finances and finally get around to that refinance once the in-laws are forcibly removed from your home after the holidays.

Come January, you apply for a refinance at your local bank or via an online lender, with grand plans to save tons of money via an über-low mortgage rate.

You know you’ve got a good credit score, a well paying job, and plenty of assets. Heck, you’ve even got a fair amount of home equity, which will make your low-LTV loan bulletproof.

As you’re daydreaming about your stellar borrower profile, the phone rings, and it’s your loan officer.

Remember your awesome credit score? Well, it dropped 30 points, thanks to all that new credit card debt.

Even though you intend to pay it, or even if you paid it, your credit score got hit because your credit utilization spiked and the credit bureaus took notice.

[What mortgage rate can I get with my credit score?]

You’ve Still Got the Green Light

As you begin to panic, your loan officer reassures you, and lets you know that you can still refinance!

There’s just one little catch. The mortgage rate you were quoted when you originally spoke isn’t going to be as low, thanks to that credit score ding.

That 30-point hit was enough to push you into a lower credit score tier, which increased a pricing adjustment, and subsequently, your interest rate.

Sure, you can still refinance. But you’ll have a higher-than-expected monthly mortgage payment, and pay that much more in interest each month.

All because you were reckless with your spending before going out and getting a mortgage.

[The refinance rule of thumb.]

It Could Be Worse

While perhaps a lot less likely, if you go nuts and rack up a ton of holiday debt, buying heart-shaped pendants from Kay Jewelers, it could be enough to kill your loan completely.

Put simply, if the debt is large enough to where the minimum monthly payment pushes your debt-to-income ratio beyond acceptable limits, you could be out of luck.

So think those big purchases through if you’ve got ambitious plans to get a mortgage in the New Year.

After all, you wouldn’t want to miss out on securing one of the lowest rates in history thanks to some cheesy diamond-stud earrings.

Your loved ones should understand. Once the refi is done you can shop to your hearts delight and make up for any unmet expectations.

Tip: When holiday shopping, avoid opening up a store credit card or any other line of credit if you plan to refinance in the near future, as doing so can really knock your credit score out of whack.

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