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Refinancing when you own two homes

Dear Dr. Don,
My wife and I have two homes. My mother lives in one house and pays just the mortgage. We owe $35,000 on this home, but the resale value is around $90,000. We owe $68,000 on our other home, which is worth $160,000. The interest rate on the first home is 7.5 percent and on the other home is 5.8 percent. We also have plots of land that are valued at over $30,000. My question is, would I be wise to take out a home equity loan to pay off the $35,000 home and possibly buy a trailer home to rent on a plot of land that we own, which only permits these trailers? -- Terry Trailer

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Dear Terry,
Look at this as two separate financial decisions, and decide if each one makes sense on its own before bundling them together in one transaction. Taking out a home equity loan to pay off the $35,000 first mortgage isn't going to realize much savings because currently the national average for a home equity loan is 7.17 percent, and the national average for a home equity line of credit, or HELOC, is 6.58 percent. Rates on the HELOC are likely to continue rising higher as the Fed continues to raise its targeted Federal funds rate over the next year.

My point is that there's not a lot of interest-rate savings when you refinance a 7.5 percent loan with a 7.17 percent loan, especially after considering closing costs. Use Bankrate's Refinancing Calculator to estimate how long it would take to recoup your closing costs.

A cash-out refinancing of the other home would allow you to pay off the $35,000 first mortgage, refinance the existing mortgage, and tap the equity in the home to buy a trailer for the plot of land. First mortgage rates are heading higher, too, but you should be able to finance at a rate close to the current mortgage rate of 5.8 percent. As I write this, the national average for a 30-year fixed-rate mortgage is 5.91 percent.

I'm not sure what you plan to do with the trailer home. Are you planning on using it as rental property, vacation property or some combination of the two? A trailer isn't likely to hold its value well over time, so you need to have specific plans for its current use. The U.S. Department of Housing has a fairly thorough discussion about manufactured housing on its Web site.

Financing the trailer by tapping the equity in your home is likely to be the least-expensive solution, but the Bankrate feature, "Financing a manufactured home," has more on financing this type of housing.

Bankrate.com's corrections policy
-- Posted: Aug. 9, 2005
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