Having two mortgages isn’t as rare as you might think. People who amass enough equity in their homes often take out a second mortgage to pay off a debt, send a child to college, finance a business, or make a large purchase. Others use a second mortgage to enhance the value of their ꦏproperty through remodeling or an addition like a swimming pool.

The upside in a second mortgage is the relatively low interest rate, but managing two mortgages can be trickier than handling just one. Luckily, there are ways to consolidate two mortgages into one,🃏 but the process can be tricky, and the math may not make it worthwhile.

Combining Mortgages

Let’s look at one example: You took out a home equity line of credit 10 or more years ago. That's essentially a second mortgage since your home serve💙s ℱas collateral for the loan.

Durinꩲg the 10-year draw period—the time when you could “draw” on your credit line—you 𒉰were paying a manageable amount: $275 per month on a $100,000 line of credit.

According to the terms of the loan, after 10 years the draw period bec💝omes the repayment period. Over the next 15 years, you have to pay dow🍌n the loan like a mortgage.

Now the $275 payment has become a $700 payment and if it's a variable-rate loan, it could move higher if the prime rate increases.

By consolidating t♔his loan and your mortgage loan, you could save more than $100 a month and lock in your interest rate rather than risk seeing it escalate if the prime rate goes up.

On the o♕ther hand, maybe you want to pay the loans off faster and want better terms that will help you doꦫ it.

How does this type of conso𝔉lidation work, and is it a good idea?

Know What You're Starting With

When you withdraw money using a second mortgage, you are reducing the percentage of your home that you rather your lenders actually own. The loss may be offset or even erased if you're spending the money to expand or improve the home or if its value has increased due to market conditions.

Nevertheless, you could be pulling cash out of your home. That's called a 澳洲幸运5开奖号码历史查询:cash-out loan and it can add to the interest rate charg♈ed for the new loan and reduce the amount you qualify to borrow.

Cash-out loans are priced hౠigher, lenders say, because the borrower is statistically more likely to walk away from the loan if they get in financial trouble.

You can go for a 澳洲幸运5开奖号码历史查询:rate/term refinance, or refi. This type of loan is simply ꧙an adjustment of the interest rate and the other terms of your current loan. The loan is considered safer to the lender because the borrowers aren't pocketing any money or reducing the amount of equity they have in the property.

Cash-Out or Refi: What's the Difference?

The distinctions matter. According to Casey Fleming, author of "The Loan Guide: How to Get the Best Possible Mortgage", the terms and the amount you pay on new mortgages could be very different.

For example, say you and a friend are both getting 75% loan-to-value refinance loans under the 澳洲幸运5开奖号码历史查询:conforming loan limit, which is $766,550 in 2024. Yours is a cash-out loan, but 🦋your friend's is not. Assuming you are equally creditworthy, your loan could still cost about 0.625 points more. 

One point is 1% of the loan amount. So, if your loan amount is $200,000, youඣ would pay $1,250 ($200,000 x .00625) more for the same loan that your friend got.

Why Cash-Out Loans Cost More

Think of it this way. If you acquired the two loans when you bought the house, it is not a 🐭cash-out loan since the second mortgage was used to acquꦿire the home, not pull cash out of it. But, if you opened the second loan after you bought the house, that was a cash-out loan. A new consolidated loan will be a cash-out loan, too.

There’s another reason the distinction is important. Because cash-out loans are riskier to the ෴lender, they may only lend 75% to 80% of your equity in your home versus 💫90% on a rate/term refi.

If you are seeking a cash-out loan, the bank💧 will demand that you have substantially more equity in the property than you would otherwise need.

How to Consolidate Loans

The lender will do all of the complicated paperwork that goes with consolidating the loans. Your job is to be an informed consumer. Don’t talk t𒁃o🦩 one—talk to several.

Since consolidating two loans is more complicated than a straightforward home mortgage, it’s best to speak personally with as many as three or four lenders. You could talk to your bank o♛r credit union, a mortgage broker, or take recommendations from industry professionals you trust.

Of course,🐈 ask them if the new loan will become a cash-out loan or a rate/term refi. Is it a fixed or variable-rate loan? Is it for 15 or 30 years?

Getting Through the Approval Process

Once you’re happy with a lender, you'll be walked through the process. Don’t sign anything without reading it first, and make sure you understand the payment schedule.

Keep in mind that a cash-out loan can be converted to a rate/term refi as little as a year later. If you do, you're no longer consolidating loans. You're refinancing a single loan.

Of course, you'll only want to consider doing this if mortgage rates are stable or lower at the time you're refinancing.

The Bottom Line

Many homeowners refinance or consolidate mortgage loans in 💮order to score a lℱower monthly payment.

That's not necessarily as smart as it sounds. You could be stretching out your mortgage indebtedness into the dim future, and denying yourself an opportunity to save more towards a comfortable retirement.

Before you refinance, calculate the real cost of your mortgage payments in total. Add in the costs of refinancing. Then co❀mpare that to the ꩵtotal you would be paying for your home if you did not refinance your mortgage.