Not Always The Decision Rests On Your Goals And What You’re Offered
Lea Uradu, J.D. is graduate of the University of Maryland School of Law, a Maryland State Registered Tax Preparer, State Certified Notary Public, Certified VITA Tax Preparer, IRS Annual Filing Season Program Participant, Tax Writer, and Founder of L.A.W. Tax Resolution Services. Lea has worked with hundreds of federal individual and expat tax clients.
The mortgage market has changed a lot in the past decade or so. In the past, virtually anybody could get a mortgageeven one for much more than they could afford. At that time, interest rates were higher, but lending standards were easier. Today its harder to qualify, and interest rates are just starting to move up from historic lows.
Maybe you took out a second mortgage back when rates were high. Thats just one reason you might consider consolidating your loans. But should you? Does it make sense? Or is it best to keep the loans separate?
Protect Your Home Or Other Assets
This means that if you can’t pay off the new loan, the home or car that you put up as security may be at risk. The lender can sell it to get back the money you borrowed.
Consider all your other options before using your home or other assets as security.
Other Debt Consolidation Mortgage Loan Options
A cash-out refi isnt the only way to consolidate debt into your mortgage. You could also get a home equity loan or home equity line of credit .
- A home equity line of credit works a lot like a credit card you can draw from the funds as needed but its secured by your home equity which means a lower interest rate
- A home equity loan gives you a lump sum at closing that you can use to pay off your debts
Both HELOCs and home equity loans can charge closing costs and/or origination fees.
HELOCs usually have an adjustable interest rate thats based on the prime rate plus a margin home equity loans usually have fixed interest rates.
Recommended Reading: Can I Get A Reverse Mortgage On A Condo
Of First And Second Mortgages
A first mortgage refers to the loan being used to buy a home. If taken together with the first mortgage, a second mortgage is used to avoid private mortgage insurance or mitigate the effect of a higher interest rate when taking out a jumbo loan .
Second mortgages can also be taken out after a homeowner has built equity in his/her home. Home equity loans as they are called, borrow against the home equity to fund major expenses like home repairs, medical bills, college costs and pay off debts.
Home equity loans are called second mortgages because their repayment is secured on the home just like first mortgages. There are two types of second mortgages:
Can You Refinance Two Homes One Loan
It is possible to combine the mortgages from two properties into one mortgage. To achieve this, you would need to refinance by taking out a larger loan on one home, and using the money to pay off the mortgage on the second home. This would leave a large mortgage on one property and the other property mortgage-free.
Read Also: 70000 Mortgage Over 30 Years
Why Consolidate Debt Into A Home Equity Loan
Home equity is the difference between the value of your home and the remaining mortgage balance. Your home equity increases as you pay off your mortgage and as your home goes up in value.
You can use your home equity to get a loan or line of credit, which, like a debt consolidation mortgage, combines your debts into one payment.
For home equity loans, the lender uses your home as security. Interest rates on equity lines of credit are lower compared to other loans. You get a higher credit limit, which is useful on higher interest loans. On a home equity line of credit , you can get a maximum of 65% of your home’s appraised value. The more equity you have in your home, the more money you can borrow.
Generally, you pay interest on the money you use, not on your total credit limit. Interest rates fluctuate depending on market conditions, so your payments could go up. As long as you pay the minimum payments, you can make multiple payments without penalty. Fees apply, such as appraisals, title search, title insurance and legal fees.
Do your homework. Calculate your home equity and how much you can borrow with our home equity calculator.
How To Combine Mortgages For Two Different Properties
Here are the steps to combining the mortgages for two different properties into one mortgage: Analyze both of your properties and find out which one has the most equity. Get quotes from several lenders. Make sure you lender knows that you will be paying off mortgage loans from two different properties.
Recommended Reading: Rocket Mortgage Qualifications
Get Free Professional Advice
There’s free help available to help you get back on track.
Financial counsellors can help you make a plan and negotiate with your mortgage or credit providers.
Free legal advice is available at community legal centres and Legal Aid offices across Australia. If you’re facing legal action, contact them straight away.
Make Sure You Will Be Paying Less
Compare the interest rate for the new loan as well as the fees and other costs against your current loans. Make sure you can afford the new repayments.
If the new loan will be more expensive than your current loans, it may not be worth it.
Compare the interest and fees on a new loan with your current loans.
Remember to check for other costs, such as:
- penalties for paying off your original loans early
- application fees, legal fees, valuation fees, and stamp duty. Some lenders charge these fees if the new loan is secured against your home or other assets
Beware of switching to a loan with a longer term. The interest rate may be lower, but you could pay more in interest and fees in the long run.
Also Check: 10 Year Treasury Yield Mortgage Rates
Refinancing To Consolidate Credit Card Debt
A viable way to consolidate high-interest debt and lower your monthly payments is by tapping your mortgages home equity. When you take a cash-out refinance, you can consolidate your first and second mortgage and replace it with a new loan for more than you owe on your property. The difference goes to you in cash, which can be used to finance important costs or consolidate other debts. Likewise, you can simply take a cash-out refi even without consolidating your mortgage.
Unsecured debt such as credit cards typically come with high-interest rates. The average APR for a new credit card is 16.04% as of November 2020. Unsecured debts do not come with collateral, which means lenders have no means to recoup losses if borrowers fail to repay. Thus, banks impose much higher interest charges on credit cards, making it harder to pay off large balances. As your debt increases, your interest charges keep growing larger.
In contrast, the average mortgage rate for a 30-year fixed-rate refinance is only 2.750% in November 2020, while a 15-year fixed-rate refinance is at 2.375%. Because mortgages are secured debts, they have much lower interest rates compared to credit cards. Refinancing your mortgage to consolidate unsecured debt will substantially lower your rate. This results in considerable interest savings over the life of your loan.
Beware of the Risks
Remember The Closing Costs
Keep in mind that refinancing comes with closing costs, just like your original mortgage did.
These costs often total 2-5% of the new loan amount so look for an interest rate low enough that youll be able to recoup the up-front cost while saving on your external interest payments.
Your cash-out refinance costs can often be rolled into the loan amount, as long as theres enough money leftover to pay off the debts you were hoping to consolidate.
Read Also: 10 Year Treasury Vs 30 Year Mortgage
Veterans Can Cash Out Up To 100%
Qualified veterans and service members can consolidate debt via the VA cash-out refinance.
Unlike other refi programs, the VA cash-out loan lets you refinance 100% of your homes value. Veterans and service members might qualify even if they dont have enough equity for a conventional cash-out loan.
Options When Resubordination Is Denied
If your home equity lender says no to resubordination but you still want to refinance, one solution would be to pay off the second loan, if you have the resources or possibly through a cash-out refinance.
However, you must retain at least 20 percent equity in the property after the cash-out refinance or youll have to pay private mortgage insurance. That extra cost could put the savings from a refi far away.
Another factor is that lenders have tightened credit amid the ongoing rate-driven refinance boom. Adding extra debt to your refinance may make lenders less keen to underwrite the new loan and if so your rate may be slightly higher.
But, on the plus side, thanks to those low rates, you may be able to save money by consolidating all your mortgages into a single loan if it works out.
One more route is to find a lender who will do a simultaneous first and second mortgage refinance. This way you can keep the second mortgage credit line and get a new first. A mortgage broker may be able to assist you with this and other types of refis that involve a second mortgage.
Read Also: 10 Year Treasury Yield And Mortgage Rates
Interest Rates And Fees If You Borrow On Amounts You Prepaid
You pay either a blended interest rate or the same interest rate as your mortgage on the amount you borrow. A blended interest rate combines your current interest and the rate currently available for a new term.
Fees vary between lenders. Make sure to ask your lender what fees you have to pay.
You may not have to make any changes to your mortgage term.
Do I Need An Owner Occupier Or Investment Loan
If you plan on renting out your second home, youll need an investment loan, which could have a higher interest rate. Investment loans might have some tax benefits, but managing a property comes with its own set of expenses, like agents and maintenance. If youre unsure about whether youre ready for the financial commitment of a second property, check out this helpful guide.
Read Also: Reverse Mortgage Manufactured Home
The Fundamentals Of Mortgage Consolidation Refinancing
Home equity is the difference between how much you still owe on your mortgage and what your property is currently worth. Once youve built enough home equity, you can borrow against it to pay for major home renovations that further increase your propertys value. Borrowers can also use this money for other important expenses, such as to consolidate high-interest debts. This is possible by taking a cash-out refinance or obtaining a second mortgage such as a home equity loan or a HELOC.
According to ATTOM Data Solutions, in Q2 of 2020, an estimated 27.5% out of 55.2 million mortgaged homes were considered equity-rich in the U.S. It increased from 26.5% in Q1 despite the widespread economic crisis caused by the COVID-19 pandemic.
Having equity-rich property means you owe your lender 50% or less on your homes current market value. You have the option to tap your home equity if ever you need money for major expenses. Apart from taking a second mortgage, equity-rich homeowners can also combine their first and second mortgage through consolidation refinancing. Instead of worrying about two loan payments, you can simplify your finances by paying for one mortgage.
Does A Home Equity Loan Have To Be Paid Off At Time Of Refinancing A
You have no equity in your home and two mortgage loans, something you’d like to change. You can combine your first and second mortgage loans into one loan with one payment through a refinance. But refinancing your mortgage loan when you are at a loan-to-value rate of 100 percent — meaning you owe as much on your mortgage loan as what your home is worth — is already a challenging task. Doing this while trying to combine two mortgage loans into one can be even trickier, but you might be able to pull off this kind of refinance by working closely with your mortgage lender.
When you attempt to combine a primary and secondary mortgage, you’re going to have a hard time getting approved if the mortgages have a 100% LTV. This is because most lenders require borrowers to have at least 20% equity in their homes. Of course, there are always a few lenders who are willing to do this for the right candidate. Typically, this person would have an excellent credit score and a stellar history of making their mortgage payments on time.
Recommended Reading: Can You Do A Reverse Mortgage On A Condo
Remember You Still Owe The Money
With any type of debt consolidation loan, the borrower should exercise caution and be disciplined with repayment. Thats especially true with a mortgage or home equity-backed loan, which could put your home at risk if youre unable to make payments.
Borrowers sometimes get into trouble because when debt is consolidated, their prior credit lines are usually freed up. Its possible to charge those lines to the max and be in debt trouble all over again.
Remember, consolidation does not mean your debts have been wiped out. Theyre just restructured to be more manageable. The real goal is to be debt-free a refinance or loan is just a means to that end.
A Clever Guide To Combining Mortgages For Two Properties
Combining the mortgages for two properties into one mortgage is a way of simplifying your monthly bills and can be an advantageous choice, but it is not for everybody. This step makes a lot of sense when you have enough equity in one of your properties to cover for the other mortgage loan. Before choosing this option, make sure you understand the process and what it is involved. If you want to combine two mortgages into one, the easiest way in which you can do this is by applying for a home refinance loan.
You May Like: How Much Is Mortgage On A 1 Million Dollar House
When Not To Consolidate Your Mortgage
Mortgage consolidation can maximize your interest savings and simplify your finances. But in certain cases, you cant reap these benefits if you refinance under unfavorable conditions. Do not consolidate your mortgage if youre faced with the following situations:
- Your mortgage will be paid off soon: Dont consolidate your mortgage if you only have a couple of years till your payment term ends . This will unnecessarily extend your mortgage, which will cost you tens of thousands of dollars on interest charges.
- Your existing mortgage has a lower rate: In some cases, your first or second mortgage might already have a low interest rate. If you cannot match that rate or obtain a lower one, its not advisable to consolidate your mortgage. Refinancing to a higher rate will increase your interest charges. This defeats the purpose of gaining any savings. Generally, its not a good idea to refinance if market rates are high.
- If the refinanced loan will require PMI: This happens when your loan-to-value ratio is more than 80% of the homes value. Private mortgage insurance usually costs between 0.5% to 1% of your loan annually. Again, this is an added cost that offsets savings from low monthly payments when you refinance.
Home Equity Line Of Credit
A home equity line of credit HELOC is a special type of home equity loan that, instead of borrowing a fixed sum, sets up a line of credit that you can draw against as you wish. It’s like a credit card secured by your home equity in fact, lenders will often give you a card to use for drawing funds.
A HELOC second mortgage has two phases: the draw period, when you can borrow against your line of credit, and the repayment phase, when you must repay the loan principle with interest. The draw is usually 5-10 years the repayment phase 10-20. HELOCs always start out as adjustable-rate loans during the draw phase, but can often be converted to fixed-rate for the repayment phase.
HELOCs offer a lot of financial flexibility. Being able to borrow money as you wish makes them useful for situations where you have a lot of irregular expenses over time, such as starting a business or an extended home improvement project. But you can also repay them as you wish during the draw phase, freeing up that amount of credit again and reducing interest charges. This makes them useful cash-management tools to smooth out irregularities in expenses or income.
Also Check: What Does Gmfs Mortgage Stand For
Know Where Your Credit Stands
The first step in taking out any type of home loan is to understand what youre likely to qualify for, according to your credit history. The better your credit, the better the loan terms you may be offered and the higher your likelihood of loan approval.
Request your free credit reports from each of the three major bureaus and review them for inaccuracies. If you find any errors, be sure to dispute them immediately.