Do I Have to Combine My Home Equity With Mortgage When Refinancing?
Combining your mortgage and home equity loan can be a smart financial move or a foolish one. Fortunately, you usually have the option when refinancing to choose to consolidate the loans or keep them separate. Your course of action will depend upon your financial needs and your own personal preference.
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Difference Between Mortgage and Equity Loans
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All home equity loans are a type of mortgage, but not all mortgages are considered home equity loans. A mortgage is used to purchase or refinance a house. An equity loan can be used for any purpose and is based upon your home’s loan-to-value ratio. For example, you purchase a house for $250,000. You put $100,000 down and obtain a mortgage for the remaining $150,000. The bank will lend up to 80 percent of the $250,000 which comes to $200,000. When you deduct your $100,000 first mortgage, you are left with $50,000 in equity. You can borrow anywhere from the lender’s minimum loan amount to $50,000 above and beyond your first mortgage.
Reasons to Consolidate
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Review your finances and your loan payments to determine if combining the loans in a refinance is the right move. One example of a situation where it makes sense to refinance both is when you need payment relief. If you have a five-year home equity for $25,000 at 5 percent interest, you will pay $471.78 per month. Combine that with your 30-year refinance, the payment for that portion of the loan becomes only $134.21, a savings of $337.57 per month. The downside of this scenario is that you pay more in interest over the life of the loan. In some cases, where a loan is a “slow pay,” meaning the borrower makes his payments, just not on time, the bank may require you to consolidate the loans.
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Reasons Not to Consolidate
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If the bank does not force you to consolidate due to a troubled debt situation, you have the opportunity to make your own choice. Perhaps you are halfway through a 10-year home equity priced at 4 percent. Your 30-year mortgage refinance is approved at 6 percent. Not only will you stretch the interest out over a longer period of time, you will be doing so at a higher interest rate. Another reason is a desire to keep your equity at one lender while moving your mortgage to another.
The Process
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If you decide to consolidate your mortgage and equity loans when refinancing, obtain an application from the lender. Fill in a loan amount sufficient enough to pay off both loans. Contact your current lender and ask for a payoff statement to give you an idea of principal, interest and cancellation fees due. Once the refinance is approved, make arrangements to close the loan. Obtain updated payoffs from the lender as of the exact closing date. At closing, sign the loan documents. Once complete, the bank will pay off the old mortgage and equity loans with a new mortgage.
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