|Homeowners can save
combining their mortgages
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
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
"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.
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."
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
"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