Have 1st and 2nd mortgages, but need cash
|  Dear
Dr. Don,
I am considering either refinancing or taking out a home equity
line of credit (HELOC). Currently, we have a first and a second
mortgage on our home. The first is for $246,500 and the second is
for $46,500. We took out two loans initially because we wanted
to avoid private mortgage insurance, or PMI, which we would have
had to pay since the down payment on the house was less than 20
percent.
Can I open a HELOC while having
a first and second mortgage? Or do I need to refinance the two loans into one
and then take out extra cash within the refinancing or then open the HELOC?
We would like to make some home improvements on our home and
pay off a credit card bill of $10,000. Our house will probably appraise for
$500,000 to $550,000. What would be the best approach?
-- Tammy Twoloans
 Dear
Tammy,
You can take out a HELOC that would be a subordinate loan to the
existing first and second mortgages, but the interest rate will
reflect the fact that it's third in line in a foreclosure.
A cash-out refinancing of the first mortgage to take
out the existing second is another possibility. Then you will
have to decide whether to put a HELOC in place or take out enough
additional cash to finance whatever amount you're trying to finance
with the HELOC. By your estimation you have enough of an equity
cushion to take this approach -- assuming the improvements
you're financing won't cost six figures.
The
current advantage to a cash-out refinancing of the first mortgage is that first
mortgage rates are about 1.75 percent lower than the interest rates on home equity
loans and home equity lines of credit. You'll pay higher closing costs on
a new first mortgage, and you have to take the money out all at once, versus as
needed with a HELOC. But with your goal of restructuring credit card debt and
financing home improvements, getting the money at closing shouldn't be an issue.
The Mortgage Professor, Jack Guttentag, has a
mortgage calculator
on his site for borrowers with first and second mortgages that want
to explore a variety of consolidation options.
Once you've
restructured the credit card debt, make it a goal to stay current on your cards.
That means paying off the balance each month, not making the minimum monthly payment.
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