Dear Dr. Don,
I am 25 years old and just recently went back to work after being unemployed for almost five months. I make $50,000 a year and have about $11,000 in credit card debt at about 12 percent, and a student loan outstanding for $9,000 at 3.75 percent. I have owned my house now for 11 months. I owe $112,000 on a Federal Housing Administration 30-year fixed-rate loan at 6 percent. The house appraised at $200,000 recently.

I would like to consolidate all of my debt, but cannot figure out the best options. I plan on living in my house for a long time. With all of my bills, and being unemployed for five months, I burned through the little savings I had, and can only afford to make the minimum payments on all of my debt. I really just want the burden of my credit card debt off my back. The debt is mostly from projects I had already started when I bought the house; when I lost income, I couldn't pay those debts -- or debts from school loans. Please advise.
-- Chris Credit-Crunch

Dear Chris,
You're less than a year into this mortgage. Refinancing into a new first mortgage is an expensive proposition. Closing costs could easily run between $2,000 and $4,000. That's a big chunk of your credit card balance.

I recommend evaluating the financial decision to restructure your debt in stages. Separate the refinancing decision from the debt consolidation decision. Before choosing to refinance, you need to see enough of a savings on the interest rate over the time you expect to be in the house. Bankrate's "Savings from refinancing" will help you estimate the savings and the payback period for a refinancing to make sense.

If it makes sense to refinance independent of the decision to do a cash-out first mortgage, you can look at adding your credit card debts into the mix. I'd leave the student loan alone. Without knowing the particulars of your student loan, other than the interest rate, the loan should have forbearance and deferral provisions that you don't want to lose by folding the debt into a mortgage.

If it doesn't make sense to do a cash-out refinancing of your first mortgage to include the credit card debt, consider a home equity line of credit. The HELOC should have much lower closing costs than a new first mortgage and a measure of flexibility in the payments, meaning the loan is interest only in the early years.

In addition, you should be able to get a HELOC at a rate comparable to your existing first mortgage. As I write this, the Bankrate national average for a HELOC is 5.6 percent, versus 8.12 percent for a fixed-rate home equity loan.

Just don't take 15 years to pay down your credit card debt.

To ask a question of Dr. Don, go to the "Ask the Experts" page, and select one of these topics: "Financing a home," "Saving & investing" or "Money." Read more Dr. Don columns for additional personal finance advice.

Copyright 2009, Bankrate Inc.

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