Ask Dr. Don By Don Taylor, Ph.D., CFA • Bankrate.com

Consolidating mortgages

Dear Dr. Don,
My wife and I are in the process of refinancing our first and second mortgage into one. The balance in the first is $88,000 at 8.25 percent and the second is $15,000. The second is an interest-only mortgage. The initial appraisal on the townhouse is $130,000. Our credit is less than perfect and that is why the broker is coming up with 8.25 percent at 30 years for $110,000, financing the origination and discount points.

If we go for this, our payments will be $114 less per month than what we pay now for both mortgages. But we are shocked at the rate we are getting. I know our credit is less than stellar, but the mortgage payments are never late. They are paid automatically. I am not sure if we should go for this. We are planning to sell the house in a couple of years. I could try to get another rate, or not refinance at all, pay down the first mortgage and work on improving our credit. I risk that the rate will go up, but I find hard to believe that by then it will be higher than the 8.25 percent that we are getting now. What do you suggest we do?
Jorge Jointer

Dear Jorge,
It sounds like there's no particular reason for you to refinance this home at these rates.

From what you say, your closing costs on this loan are about $7,000. Saving $114 a month means that it will take you more than five years to recoup these costs.

If you're only going to be in the house for a couple of years then it doesn't make sense do this refinancing.

Because the loan-to-value with the new loan is over 80 percent you're probably scheduled to pay private mortgage insurance (PMI). If you weren't financing the points and closing costs, you could avoid this expense, speeding up the payback.

You don't say when the interest-only second mortgage comes due. If it comes due before you plan to sell the house, then that could be a reason to consolidate these mortgages.

Waiting to refinance until you have a better credit score means that you're even closer to when you plan to sell the house, and refinancing will make less sense than it does today.

Ask your mortgage broker to tell you your credit scores and what problems he sees on your credit report. If he won't share them with you, then get your own Equifax credit report and FICO credit score.

-- Posted: Jan. 3, 2002