home equity

Do math before merging loans

Don Taylorq_v2.gifDear Dr. Don,
My husband and I are considering refinancing our 30-year mortgage. We also have a 10-year-fixed home equity line of credit. If we decide to refinance, can I combine our 30-year mortgage and our HELOC into one loan?
-- Brandi Bundle

a_v2.gifDear Brandi,
Mortgage rates have actually bounced around over the past couple of months along with the financial markets as a whole, but trending higher.

Bankrate's weekly Mortgage Analysis column offers the best finger on the pulse of mortgage rates. I have the column sent to me as an e-mail each week. You can, too, by signing up for this feature. Bankrate's Mortgage Rate Trend Index also lets you know where experts think mortgage rates are headed.

The interest rate on most HELOCs is based on the prime rate. That rate has been falling as the Federal Reserve reduces the target federal funds rate. The prime rate is 3 percent above the fed funds rate. It currently is at 4 percent.

You can track the prime rate on Bankrate using the "Rate Watch: Track leading interest rates" feature. The interest rate on your HELOC shouldn't be the driving force in refinancing your existing mortgage loans.

Combining the two mortgages into one can make sense, especially if you plan on being in the home for a long time and don't want to face the risk of seeing HELOC rates going higher. Getting a lower rate on the refinancing than on the existing first mortgage will help justify the refinancing.

Check out Bankrate's refinancing calculator to decide whether or not you should refinance your mortgage.

There are some reasons not to combine the two loans. For example, you may want to avoid it if doing so would require you to pay private mortgage insurance on the loan. Typically, borrowers have to pay PMI if the loan-to-value is greater than 80 percent of the appraised value of the home.

Also, it might be a mistake to combine the two loans if there is a prepayment penalty on one or both of the existing loans.

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