Combining first and second mortgages into one is an appealing option for many homeowners. Millions of homeowners have taken advantage of the equity in their home and financed second mortgages in the form of home equity loans or home equity lines of credit – therefore, it’s not uncommon for homeowners to have two mortgages.
In many cases, this secondary loan has helped the homeowner avoid private mortgage insurance or the effect of raised interest rates that were applied to jumbo loans. Loans using equity as collateral have allowed homeowners to complete improvements and renovations to their property, debt restructuring or investments. Combining two mortgages into one may provide a financial advantage to the homeowner as ownership interest value is built in the home.
In short, yes, it’s possible to combine two mortgages into one. But is it always a wise decision? To answer this, you must first identify your individual situation.
Before jumping into the consolidation process, understand your situation
Keep these two scenarios in mind:
Have you done a cash-out loan with your second mortgage? If this is the case, the new loan you refinance for may be more expensive, and the amount for which you qualify may be reduced. It’s important to be aware of this drawback before jumping into the refinance process.
The rate/term refinance (refi) will be important to weigh. This loan is an adjustment on the interest rate and terms of your current loan. In most mortgage consolidations, this loan is considered safer. The lender has assurance that the borrower isn’t pocketing any money or reducing the amount of equity they have in the property.
These are two differentiating factors that can mean entirely different loan terms for a borrower.
When is combining mortgage loans a good idea?
Combining first and second mortgages into one can be a positive experience. The most favorable factors of combining mortgages are:
- It can save a homeowner money by lowering the amount of monthly payments towards fixed rate mortgage with lower interest rates.
- Combining mortgage loans can also shorten the life of the loan and remove substantial amounts of interest over time.
- Further, interest payments may be tax deductible, making the combination refinance an even more attractive solution to financial and mortgage woes.
It is possible for a homeowner to simplify and organize their financial life by completing a mortgage refinance.
Combining mortgages allows the homeowner to pay a single, low-interest rate mortgage payment. Whether or not combining first and second mortgages into a single payment is a good idea depends on several factors:
- How much equity you have in your home?
- How much is left on your second mortgage?
- What period of time that passed since you secured the second mortgage?
- What is your current credit score?
The choice to refinance and consolidate two mortgages can eliminate higher interest loans and save you money.
Here are four times when combining two mortgages is a good idea:
- You had more than one mortgage when you originally financed.
- You want to use an FHA loan.
- Your combined loans are greater than the conforming loan limits.
- You haven’t taken money out on the second mortgage recently.
Consider this example
Let’s say you took out a home equity line of credit 10 or more years ago, and during the draw period you were paying $275 per month. Your line of credit was $100,000.
After the initial 10years you entered the repayment period. So, for the next 15 years you are required to pay down the loan like a mortgage. In this scenario, the $275 monthly payment has skyrocketed to $700 per month. This is a common situation for borrowers with adjustable rate mortgages – the monthly obligations could rise even higher if the prime rate increases.
So, in this situation, it makes sense for a homeowner to consolidate two mortgages. Combining these two mortgage could offer a host of benefits to the borrower:
- Save money each month on interest
- Lock your interest rate to avoid rising costs in the future.
Homeowners may be able improve their monthly cash flow and increase the amount of discretionary income by consolidating first and second mortgages at a lower loan interest rate.
When combing your first and second mortgage doesn’t make sense
Combining two mortgages isn’t always simple though. Lending regulations have tightened over the years, and depending on your borrower profile, lenders may be hesitant to shell out the cash.
Cash out refinance limitations. If your second mortgage is a HELOC, consolidating both loans may be considered “cash out” financing and subject to cash out loan-to-value limitations. Most banks limit cash out loans to around 80 percent of the value of the home. If you owe more than 80 percent between your mortgages, it may not be possible for you to combine your mortgages. If lenders do approve a consolidation, the amount you can borrow may be reduced.
Additionally, combining mortgages wouldn’t make sense for you if:
- You have a low rate on your second mortgage. If you already have a low interest rate on your second mortgage do the math on a refinance calculator to make sure you’ll be saving money through a loan consolidation. It might be that you already have the least expensive option.
- You will soon pay off your second mortgage. If you are nearing the end of your current loan’s life, it might not make sense to refinance. Refinancing can stretch the time of your payment out, so even if you have lower monthly payments, you might end up paying more in the long-run.
- Consider if your new loan will require PMI. If the total combined loan amount is greater than 80 percent of the value of your house, you will be forced to pay private mortgage insurance. PMI costs between 0.5 to 1 percent of the entire loan amount on an annual basis. So, on a $300,000 loan this means the homeowner could be paying as much as $3,000 a year. This cost may offset the benefit of a lower monthly payment.
It’s also important to calculate your breakeven point. Refinancing, regardless of which product you use, costs money. It’s common for the fees to be recovered by the long-term savings, but only if you’ll be living in your home long enough to redeem the reward. You’ll need to do the math to see if this is the case for your situation.
How to consolidate your first and second mortgage into one
The process should begin with an examination of your current loan terms so you can properly assess what refinancing will mean for you. Next, contact your current lender to see if they are able to offer you a deal for being an existing customer. Some lenders like SunTrust will waive closing costs on refinancing if you’ve been a customer with them for three or more years.
Even if your lender offers a great deal, don’t stop your research there. Speak with many different lenders. The paperwork associated with loan consolidation is more technical than a straightforward mortgage, so getting as many opinions as possible will be beneficial to you in the end. As with any other loan, your options range from regional banks and credit union to a mortgage broker, or industry professionals you trust.
There are often fees and costs associated with prepayment of the existing loan. An appraisal of your home or research of the current local housing market can be used in determining the equity in your home. There must be enough equity to pay off the second mortgage when you are combining mortgages. Compare loan rates and fees from a variety of lenders, and apply for the cash-out option loan that includes the amounts necessary to pay off the initial mortgages. You can ask for a good faith estimate from lenders you are considering to see an approximate quote of how much your refinance will cost. Also check the terms on your existing mortgage to see what penalties you may incur for consolidating and refinancing.
From there you can use a mortgage calculator – it is the easiest way to compare how your current mortgage obligations will measure up to a new deal. What will a loan consolidation do for your bottom line?