You may be carrying two mortgages for a number of reasons. One of the most common types of second mortgages is a home equity loan or line of credit that use equity you've built up to back a new loan. Then, you can use those funds for any number of reasons, from a remodel project to paying for a major expense like a wedding.
If you have two mortgages, you may want to consolidate them, depending on whether you would save more money and whether the move would help you meet your financial goals. Here's how mortgage consolidation works and whether it is right for you.
Key Takeaways
- Consolidating two mortgages into one could get you a lower interest rate or a shorter loan term, which can save you money.
- Refinancing from a variable-rate mortgage to a fixed-rate loan can provide predictably with loan payments.
- If you are considering consolidating loans, calculate you potential savings, factoring in any prepayment penalties.
- You may pay more in interest in the long-term if you consolidate mortgages to lower your monthly payment amount.
- Loan consolidation can make managing your loans easier.
4 Reasons to Consolidate Your Mortgages
Whether you are using a new mortgage lender or applying for a loan with your current lender, here are four reasons for consolidating:
1. Reduce Your Interest Rate
One main reason many people consolidate their loan is to lower their interest rate, which can save you money in the long-term. The lower the interest rate, the less you will pay in total over the whole term of the loan. Using a mortgage calculator can help you estimate these costs to see how they fit in your budget.
You could potentially get a lower interest rate if:
- Mortgage rates have declined since you took out your mortgages
- Your credit standing has improved
- Your adjustable rate mortgages have adjusted and increased your monthly payments
2. Eliminate the Risk of a Variable-Rate Mortgage
Payments are often lower at the beginning of a variable-rate mortgage, so you may purchase a home you can afford now, but not later. As the introductory period ends,you could find the new payment does not fit in your budget. Consolidating your mortgages into a single fixed-rate mortgage eliminates the risk that your payments will rise.
Consolidating to a fixed-rate mortgage from an adjustable rate one can be particularly good move when overall interest rates are relatively low.
Simply comparing monthly mortgage payments is not enough to determine which loan will save you the most money. You need to factor in the total interest payments over time.
3. Pay Off Your Loans Faster
Along with combining both loans into a single payment, some homeowners consolidate to have a shorter loan term. The total amount of interest you will pay is lower with a shorter loan term, and you will fully own the property sooner.
However, keep in mind that the monthly payments will likely be higher when you consolidate to a shorter loan term. For example payments on a 30-year fixed-rate mortgage with a 6% interest rate would be roughly $2,010.91 per month (with property taxes and homeowners insurance). With a 15-year mortgage with the same terms, your payment would be about $2,694.97, according to Investopedia's mortgage calculator tool.
4. Lower Your Payments
You may want to consolidate to lower the amount of your monthly payments if your budget is tight. You can do this by taking out a longer-term loan if you can't get a loan with a lower interest rate.
Keep in mind that decreasing the payment amount with a longer loan term will usually increase the amount of total interest you pay.
With this strategy, you will be putting less of your monthly payment toward your principal. Interest is front-loaded into most mortgages, which is why a smaller amount of your payment goes toward principal in the early years of a new mortgage.
What Is a Cash-Out Loan?
When you refinance a mortgage with a cash-out loan, you are essentially taking out the equity in the home and receiving it as a lump sum of cash. To do this, you borrow more money than you have equity in the home.
What Is a Loan-to-Value Ratio?
A loan-to-value ratio (LTV) is a ratio that lenders use to help them determine whether lending to you is a risk. It compares the amount of money you're borrowing to the value of the underlying asset. Lenders typically want a borrower to have a loan-to-value ratio of 80%, but some loan programs allow higher rates.
How Does a Piggyback Mortgage Work?
A "piggyback mortgage" is essentially a second mortgage that helps a borrower meet down payment requirements. For example, you may take out a main mortgage that requires a 20% down payment. So, you could use a "piggyback mortgage" to pay another 10% and then put down 10% of your own money. These second mortgages typically have higher interest rates.
The Bottom Line
If you consolidate your mortgages, make sure the move benefits you in the long run. Look at the total amount you will have to pay on the loan and the pace at which you will build up equity.Simply comparing payments is not enough to determine whether a consolidation is right for you. You also need to weigh the cost of interest payments.
