The lender wants to make sure future debt obligations do not impact the integrity of repayment on the loan they are making to you. If the lender allows you to pay off the credit card balances, who’s to say you wouldn’t take out consumer debt again and be in the same situation you’re in in the future? Another concern the lender has- is with larger debt obligations relative to the total monthly housing payment, that creates additional risk for the lender and repayment of that loan in the future meaning that the more debt you have ie house payment plus liabilities, makes the possibility of default greater.
What To Do:
Run a cost-benefit analysis of leaving the debts in place or paying them off by taking out a bigger loan against your home. Determine which option makes the most sense given the cost versus the monthly savings as a result of paying the obligations off.
For example let’s say by simply reducing the interest rate you can save $300 a month on restructuring the loan for a rate/term loan. Or you could save $700 per month by restructuring the loan for a bigger amount and at the same time paying off $30,000 of credit cards, let’s say the cost on both is the same, call it $3000 for illustration purposes. Which scenario has the better return for the dollars spent? The cash out refinance provide the greatest return on those monies at the cost of having to reopen credit cards after the close of escrow.
You can also have your loan officer give you a detailed spreadsheet showing you the various choices you have an advising you of the best available options with your money. In fact your loan officer should be doing this for you anyway. If they’re not? That’s a sign you need to get a second opinion from another mortgage professional.
