Household Blended Debt Rate
A mortgage is a mortgage, but stepping back for just a moment, you may want to look at it as just one of a collection of tools you can use to manage your complete financial picture, especially if you have a significant amount of non-mortgage household debt.
Mortgage rates are at historic lows, and being able to leverage this fact to your benefit may save you hundreds of dollars each month and thousands of dollars per year.
In this article we'll discuss using the equity in your home to responsibly manage your total financial picture.
Your Total Financial Picture
The first thing that you want to do is sit down with a calculator, a pen, and a piece of paper to figure out what exactly you are paying on your debt each month, and determine what is called your Household Blended Debt Rate, or HBDR.
Household Blended Debt Rate Calculator
Use our Household Blended Debt Rate Calculator to determine your rate including estimated tax advantages. Then save report to PDF.
We'll use a very basic example:
You have a mortgage with a rate of 5.0% and the payment is $781 per month. We'll exclude taxes and insurance here because there is no interest calculated on these items, and you would pay them regardless of your interest rate.
Credit card #1 whose balance is $12,000, interest rate is 15% and minimum payment is $360. $150 of this is interest.
Credit card #2 whose balance is $7,500, interest rate is 17% and minimum payments is $250. $106 of this is interest.
Our monthly payment for these three payments is currently $781 + $360 + $250, or $1,391.
Here is where we get to the nuts and bolts of this whole process. To calculate your HBDR, you very simply want to take each debt amount as a percentage of the total debt amount, then multiply it by the interest rate.
Total debt is $159,500. We get this by adding $140,000 (current mortgage balance) + $12,000 + $7,500.
The mortgage balance represents 87.7% of our total debt. We get this by dividing $140,000 by the total debt of $159,500. We then multiply that percentage by the interest rate of the individual debts.
$140,000 / $159,500 = 87.7% then 87.7% * 5.0% = 4.39
$12,000 / $159,500 = 7.5% then 7.5% * 15% = 1.13
$7,500 / $159,500 = 4.7% then 4.7% * 17% = .80
If we then add 4.39, 1.13 and .80 we finally arrive at our HBDR of 6.32%
Now, we have something to work with. If we take this entire debt and roll it into one mortgage of $159,500 at 5.5% (which is higher than the original mortgage rate of 5%) for 30 years, we get a payment of $906.52. At the time of this writing, a 30 year fixed rate mortgage is going for significantly less than 5.5%, but you get the idea that this example is demonstrating.
So if we subtract the new payment of $906.52 from the original payment of $1,391 we get a difference of $484.48. The savings in fact is even greater if we bring in one more factor, that being that mortgage interest is usually tax deductible, whereas credit card interest rarely is. See your tax professional for more details.
We hope that this article has given you something to think about in your own personal finances. Use the formulas here to calculate your own HBDR and see what a refinance can do for you.
As always, if you have any questions, give Poli Mortgage a call and we can walk you through the process.