I have always had good credit and recently recieved an intriguing offer from a credit card company. They sent some convenience checks with no transaction fees, and 3.9% APR for the life of the balance. I have a credit limit of $35K on this account. I owe about $39K on my home mortgage which is financed at 6.5% and I have about 11 years left to pay. I am considering using the convenience check plus a little savings to pay off my mortgage. I have used various mortgage / credit card calculators and they all show that if I make the same monthly payment I could pay off my house 5 years earlier if I go with the convenience check at 3.9% APR. Nevertheless, I am concerned that having $35K on revolving credit will negatively impact my credit score. However, I don't plan on making any major purchases in the next year or so. What is your advice?
If the checks actually have a 3.9% fixed interest rate, you could save yourself a lot of money by using these checks to pay off your mortgage balance. I would warn you to carefully read the terms of the credit offer to verify that the 3.9% rate will not increase during the term of the loan.
The major impact, here, is the time value of the money. Ironically, if your effective tax rate is 40%, then your 'after-tax' cost of the home mortgage is only... 3.9% (a strange coincidence). But, with the new credit you will be paying it down monthly and not just waiting for a tax refund from the IRS at the end of the year (which probably wouldn't be used for the mortgage anyway).
In addition, if you decide to pay off your mortgage using a revolving account, make sure that you make all payments on time. If you miss any payments, the creditor will likely use your misstep as an excuse to increase your interest rate to the ?default rate,? which can be as much as 30%. Credit contracts, especially those used by credit card companies, are notoriously complicated. Since so much money is at risk in this transaction, I encourage you to consult with an attorney well versed in consumer credit agreements to confirm that you are correctly interpreting the credit agreement before you move forward with the loan. If you and you attorney feel confident that you correctly understand the loan terms, and that you will be able to make all payments on time, accepting this loan may be a wise financial decision.
Before you move forward with this loan, you need to make sure that your current mortgage loan does not include a pre-payment penalty. You can contact your mortgage company to find out is there are any pre-payment penalties in your agreement. If you find that you have a prepayment penalty in your mortgage note, you should discuss the pros and cons with your attorney or financial advisor before you make any changes to your current obligations. Depending on the amount of the prepayment penalty, this deal may still save you some money.
Having a $35,000 revolving account on your credit report could have a negative impact on your credit score, depending on the balances and available credit limits on your other revolving accounts. Credit scoring is too complicated for me to say specifically how much an account of this size will have of your credit score. However, since you state that you are not planning any large purchases in the near future, the prospect of paying off your home 5 years earlier is probably more important than maintaining a perfect credit score.
To read more about mortgage loans, I invite you to visit the Bills.com Mortgage Resources page at http://www.bills.com/mortgage/
I hope that this information I have provided helps you Find. Learn. Save.