Dear Dr. Don,
I currently owe $37,281 on my mortgage. I have about seven to eight years left to pay. The interest rate is 6.125 percent. I just took out a car loan for five years. The interest rate is 5.99 percent and the loan is for $26,131. I need approximately $26,000 to fix up my house. I also plan on having extra cash for emergencies, like new appliances, etc. This brings the grand total to $105,000.
I have been in my house since 1991. I plan on staying here for at least 20 years or for as long as my health allows. I am three years into remission from ovarian cancer. Should I refinance or take out a home equity line of credit for 15 years or 20 years? Should the car loan be included in either scenario?
I am at a loss. I’ve been told to refinance, take out the line of credit, include the car loan, don’t include the car loan and do a home equity loan. Could you please help me out with some guidance? I would like to do this soon, before rates start going up. Also, where should I look to get the monies?
— Joyce Juggles
Since you’ve been in this home for around 18 years, I’m going to assume you have enough equity to accomplish a financial restructuring without needing any private mortgage insurance. You plan to stay in the home, health permitting, for another 20 years, which gives you a lot of flexibility in structuring the financing.
You didn’t describe the income side of the equation. You need to have income to qualify for any loans you want to take out. You’re talking about $50,000 in new money to go alongside your existing debts. You need the income coverage ratios to justify the loans.
Unless you need to stretch the loan term to make the payments affordable, the goal should be to minimize the total (after-tax) interest expense. Taking your existing home mortgage at 6.125 percent with seven or eight years to go and refinancing it with a 30-year, fixed-rate mortgage at Bankrate’s current average will significantly increase your total interest expense.
Similarly, refinancing a five-year car loan with 30-year money also boosts the total interest expense.
Rates have already started to go up. As of this writing, Bankrate’s national average for a 30-year, fixed-rate mortgage now stands at 5.95 percent. Fifteen-year fixed rates are also up, to 5.37 percent. Although a modest reprieve could be in the cards, the percentages are so small that there’s no point in waiting for it.
I’d lean toward a cash-out refinance with a 15-year, fixed-rate mortgage. I ran some numbers and got a result that gave the edge to the cash-out refinance. You can estimate which alternative makes the most sense by using the Mortgage Professor’s debt consolidation calculator “Homeowners with One Mortgage.”
The best way to shop rates among mortgage providers in your market is to use Bankrate’s “Rate Search” feature.
Read more Dr. Don columns for additional personal finance advice.