How Not To Handle Money

I was listening to the Dave Ramsey talk show recently and a lady called in and had done the following financially…

She took out a home loan to consolidate her $8000 in credit card debt. Fairly normal. For reasons undisclosed she chose a new 1st mortgage instead of a 2nd mortgage or some other type of home equity line of credit. Which meant she had to pay closing costs (though you can usually get a lower interest rate). Since her credit was bad, she had to pay $7000 in closing costs and still only got an interest rate of 9% (which many people have on their credit cards). This $7000 was, of course, added to the new mortgage — since if you had $7000 you could all but pay off the credit cards.The best part is that she actually took $15000 of equity out of her house (and only increased her loan by $22000) and so she had $7000 left over. She then decided to called Dave Ramsey the king of “get out of debt at all costs” to ask how she could best invest that $7000. Nice.

For you number crunchers out there: When you consider the closing costs her effective interest rate was actually 10.8% on that $15K and that’s spread across a 30 year loan…. it’s actually much worse spread across, oh, say 10 years… then your at a 20% effective interest rate. Ouch.