Paying for the new deck with a home equity loan was a smart move a few years back. But giving that financial paperwork another look today might be even smarter.

The recent decline in interest rates and rapid increase in property values means more consumers can combine several loans on their property into a single mortgage and save more than they would by refinancing the first mortgage alone.

Multiple mortgage consequences
"If you have multiple mortgages, it is very possible and highly likely that the second mortgage or liens of record are at a higher rate than people's first mortgages," says Bill Jucha, senior vice president for retail production at California Federal Bank's mortgage division.

"Combining first and seconds will get all those funds, if you will, into the lower interest rate scenario."

Borrowing against home equity has become wildly popular during the past couple of years as banks and other lenders have increasingly promoted profitable loans and lines of credit. With tax-deductible interest and rates lower than those offered by credit cards, these loans also made financial sense for many borrowers.

But some people may be able to benefit even further by taking advantage of today's financial conditions -- interest rates have dropped and home values have climbed, making money cheaper and more equity available.

The Bankrate.com national average rate for home equity loans stood at 8.9 percent on Jan. 8 -- more than two percentage points above the average 30-year fixed mortgage rate of 6.63 percent. And the value of the average U.S. home increased by more than 5.5 percent last year, according to data from the Federal Housing Finance Board.

"Probably about one-third to one-half of the files that we look at are people who are combining first and second mortgages," says Stephen Neufeldt, underwriting manager at Dovenmuehle Mortgage Inc. in Schaumburg, Ill.

Costs and savings
Many of the same basic rules that apply to standard refinancing apply to this maneuver as well, lenders say. The key questions are: How much will it cost to get a new loan; and how much will be saved each month? Dividing the closing costs by that monthly savings spells out how long it will take before refinancing pays dividends.

Say that, in January 1990, a couple took a 30-year, fixed-rate mortgage at 9.96 percent to buy a $150,000 home. They have been paying $1,093 a month and still owe $115,176.

They added a deck and did some interior work in June 1997. They borrowed $20,000 in a 9.69 percent home equity loan to do the work. The monthly payment on the 10-year loan is $261, and they still owe $17,852.

The home's value has increased 11 percent in nine years. It is now worth $166,500.

By combining the two loans into a new 30-year fixed mortgage for $133,029 at the Jan. 8 average rate of 6.63 percent, the couple would lower their monthly payment to $852 from $1,354 -- a savings of $502.

Just like starting over
Starting the 30-year countdown all over again may be daunting to some borrowers, but by using some of the monthly savings as extra principal payments -- or sinking it into another investment -- they can come out ahead.

"If you're applying for a new 30-year mortgage and you're going to roll that in, essentially you're paying on that second for 30 years," Neufeldt says. "But if your objective is to reduce your monthly payment, then you can accomplish that."

Combination loans may be especially important to people with "balloon" equity loans, says Cal Fed's Jucha. The loans allow borrowers to make interest-only payments, or payments of some combination of interest and principal, until the loan term expires. Then the balance either has to be paid off or refinanced.

"People with a balloon payment, rather than waiting until it comes due, may find today is the time to pay that (loan) off," he says. "You know you have a good market right now, and if you've got a balloon due in three or five years, you don't know what the interest rate cycle is going to be."

Some restrictions do apply
There are a few restrictions on the practice of combining loans, however, as well as troubles some high-risk borrowers will confront.

For one, lenders consider people with new home equity loans -- loans less than 12 months old -- to be getting "cash-out refinance" mortgages instead of cheaper, simpler "rate-and-term refinance" loans. That means the new loan amount can not exceed 75 percent of the home's value, rather than the 90 percent to 95 percent allowed borrowers with "seasoned" equity loans.

Neufeldt adds that home equity line of credit borrowers also face the stricter cap if they've drawn down more than $2,000 in the last 12 months, regardless of how long the lines were open. People who have taken out loans at 125 percent of the value of their homes don't have the option to refinance this way at all.

"Sometimes people are ... backwards on their mortgage and they owe more than the house is worth," says Jim Shaler, a senior mortgage banker in Tampa, Fla., with Regions Financial Corp.'s home loan division. "We can't do anything in that case."

-- Posted: Jan. 13, 1999