Can I Combine My Home Equity Loan & Mortgage?
Many homeowners can combine their mortgage and home equity loans by refinancing their mortgages. Normally, first lien mortgages have lower rates than home equity loans so people attempt to combine the two to lower their monthly expenses. However, lenders only enable people to refinance if they have sufficient equity in their homes.
Other People Are Reading
-
Cash Out or No Cash Out
-
Generally, lenders regard refinances that involve paying off anything other than a first mortgage as a "cash out refinance." Freddie Mac, the government-sponsored entity that buys most mortgages, only buys "cash out" refinance loans if the loan-to-value ratio does not exceed 80 percent. With straight refinances, Freddie Mac buys loans with LTVs of up to 95 percent. Most lenders use these guidelines as the basis for all refinances. However, lenders classify fixed-rate, fixed-payment home loans refinanced with first mortgages as straight refinances. Refinancing involving other home equity products are "cash out" refinances.
Appraisals
-
Homeowners must pay for full appraisals when they refinance their homes, and lenders use these appraisals to determine whether the loan falls within maximum LTV limits. People whose houses have lost value are often unable to refinance because the proposed loan amount exceeds the current value or the LTV limit. Some individuals refinancing loans backed by the Federal Housing Administration can overcome this issue. This is because the FHA lets people use appraisals from the original loan for refinancing, but only if they intend to refinance the first mortgage and not a second lien.
-
Interest Rate Considerations
-
Many people refinance because they have a home equity loan with an interest rate exceeding current rates for a refinanced mortgage. However, people with high balances on the first mortgage and small second lien balances often realize little or no benefit by refinancing. If a homeowner owed $200,000 on a first mortgage at 5 percent and just $15,000 on a second loan at 8 percent, a refinance at 5 percent overall would lower their interest payments. However, closing costs would more than offset the savings.
Payment Considerations
-
Home equity loan products normally have terms that last for 10 to 20 years, whereas most mortgages last between 15 and 30 years. When a homeowner refinances, the term, whether 15 or 30 years, starts over. The monthly payment may decrease but a homeowner who had already been paying on the old loans for several years, now has to pay the new loan for many more years. The extra years of payments often negate any short-term gain offered by a reduced monthly payment.
-
