Amidst the subprime disaster and the current mortgage industry overhaul, companies like Ditech continue to release risky mortgage programs that remind of us how we got into this mess to begin with.
I recently saw an advertisement on television for the “Ditech Freedom Loan,” which offers up to 125% loan-to-value of your home’s value in the form of a home equity line.
The general pitch from Ditech is that you, the consumer, likely have holiday debt stacking up on credit cards with nowhere to turn. That’s where the Ditech Freedom Loan comes in.
It allows you to consolidate credit card debt and other high-interest loans by opening a second mortgage on your property, allowing negative amortization up to 125% of your house value.
Considering property values continue to stagnant and drop nationwide, securing a negatively amortizing second mortgage behind your first mortgage is probably a bad idea.
Ditech has an example on their product landing page, which explains that you’ll reduce your monthly credit card payments by $200 a month if you pay off $24,500 worth of credit card debt and move that balance to a $27,000 Freedom Loan.
But if you read the fine print, they’re assuming your credit cards have an interest rate of 18%, and your new Ditech Freedom Loan has an interest rate of 12.75% with a 2-mortgage point cost (13.635% APR), and a monthly mortgage payment of $299.44 for 300 months.
So the repayment of your $27,000 Ditech Freedom Loan is roughly $90,000. You do the math.
It might be best to just pay off the credit cards, consolidate them with your present bank at a low APR below 5%, or do a balance transfer to a 0% APR credit card.