How to Consolidate Secured Debt Into One Loan
Many times when you look over your finances, you realize you have more than one loan tied to your home. Looking closer, you may see a big difference between the rates on the first mortgage and second (and maybe even third). It's time to consolidate when you can combine the two loans into one and save money per month and in interest in the long run. A good rule of thumb: Consider consolidation when you get at least 1 percent difference in your monthly mortgage rate (not the APR). If you can get a 2 percent difference or more, definitely consolidate.
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Things You'll Need
- A copy of each mortgage's loan statement
- A copy of your last tax bill on your home
- Two months of bank statements for your checking and saving accounts
- Two years of tax returns
- Two months of pay stubs
Instructions
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Assess Your Situation and Consolidate Your Debts
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Look over your mortgage loan statements. Figure out the interest rate on both mortgages and what your overall monthly payments are. Find your most recent tax bill and get your most recent assessed value from it.
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Contact a local mortgage loan officer for advice. Find out what average interest rates are on a first mortgage on the day you call. Find out the average fees associated with refinancing. After providing the information collected above, ask the loan officer whether he believes refinancing would be a viable option for you.
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If you and the loan officer agree that refinancing is the way you should go, bring all of the collected items to the loan officer (the tax bill, bank statements, tax returns and pay stubs) and fill out an application. The loan officer may require additional documentation based on your situation, but the list is a good starting point.
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The mortgage loan officer will have your house appraised and your application will go through the underwriting process. At this point, your only responsibility is to provide any information requested from any parties involved in the process--be it the banker, the appraiser, the closing attorney or title company.
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Once your mortgage is closes, start paying on this mortgage to ensure that your credit score stays intact and that you benefit from the consolidation. Take the extra money that you would have been spending on your mortgage, now that your payments are lower, and use it to reduce your other debts. Once those are gone, start placing those funds down on the principal of your mortgage payment and you will be debt free sooner than you imagined.
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Tips & Warnings
On a 30-year fixed mortgage, you can take seven years off the end of the loan by simply making one extra payment per year. This can be accomplished by either paying biweekly (every other week as opposed to once a month) or by simply making one lump sum extra payment per year. Always make sure extra payments go toward the principal and not future payments. If they are applied to future payments, the extra money does not reduce your overall mortgage--it just ensures that you won't be late next month. Another easy way to make sure consolidation is worth it is to take the total closing costs and divide it by how much you save per month in your payment. If it takes less than two years or 24 months to break even, it's time to refinance.
Trust your gut. If you feel like consolidating your loan is not a good option for you, don't do it.
