Recession Watch: Should I consolidate my debt by refinancing my home?

The first thing that I thought early last Tuesday morning, when I heard the news of the 3/4-point drop in interest rates, was that we were sure going to get a lot of mortgage companies dialing for dollars in the coming days. And sure enough, come 9 a.m., the phone calls started, so many mortgage brokers eager to convince me to consolidate my credit card debt, maybe take out some cash for renovations! And roll it all into a nice fixed-rate mortgage. Sounds lovely, hmmm?

Not so fast. I'm at the end of a five-year ARM, and my interest rate is about to start floating -- it can change monthly. While I've made my peace with this (there are maximum limits, but no minimum limits, to how far the rate can float; I remember my parents' 14% mortgage and sigh happily), it's really not about the sort of loan I have now. It's about the uncertainty in the future.

Consolidating your credit card debt into your mortgage has lots of perks. You can deduct your mortgage interest, for starters, and it's a good bet your interest rate on a home loan is far less than your credit card interest rate. It seems like a good idea, especially in an environment of plummeting rates.

But for all but the most disciplined and job-secure of folks, consolidating your debts into your mortgage in a recession environment is possibly the worst thing to do. Here's why:

What got you into credit card debt in the first place, won't go away in a recession. Whether you're just the sort of person who needs things (and that Donna Karan suit is 60% off!), or if you can't afford groceries and doctor's bills some months, and put them on the credit cards: if you're anything like me, or the vast majority of the rest of our nation, your behavior will continue. It wasn't until I cut off my credit card supply that I stopped demanding them. I'm so glad I didn't heap that debt on top of the roof that covers my family's head.

If rates should go up, or you should suffer a sudden income reduction, it will be that much harder to cover your mortgage payments. My rule of thumb in debt: pay the mortgage first. It's way better to have your credit cards refused than your house foreclosed upon. That payment that seemed so affordable when it was reducing your credit card debt could one day make your presence on the "home owner" list questionable; and, if you were wondering, that's the worst that could happen.

Having a clean slate with credit cards has the wrong effect on most people. Think you'll get your balance to zero and never go back? Instead, you're more likely to see that quick, efficient wipe-out as a reason it's ok to spend money. It would be so much more effective if you had to work to get the credit card debt to zero -- by cutting them up and paying extra each month, depriving yourself of dinners out and new toys.

This post is part of a series offering consumers advice on what to do during a recession.

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