How to Combine Two Mortgages Into One?

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How to Combine Two Mortgages Into One?

It’s not as unusual as you may believe to have two mortgages. When they have enough equity in their houses, people often decide to get a second mortgage. They may use this money to settle a debt, fund the launch of a company, send a kid to college, or make a big purchase. Others may utilize a second mortgage to renovate or build improvements, like a pool, to increase the value of their house or land.

But managing two mortgages might be more difficult than managing one. Fortunately, there are methods for combining or consolidating two mortgages into a single one. However, the consolidation procedure itself may be challenging, and the math may ultimately determine that it was not justified.

Key Takeaways

  • Being in possession of two mortgages is a frequent circumstance that may be made easier by consolidating them into a single loan.
  • It could be necessary to work with a knowledgeable broker who has expertise doing this to combine two loans into one.
  • Consolidation has expenses associated with it that may prevent it from being a wise choice in the long run, even while it might simplify your finances and perhaps save you money over time.

Combining Mortgages

Let’s examine one illustration: You obtained a home equity line of credit ten years ago or more, and throughout the draw period—the time during which you could “draw” from your credit line—you were making modest monthly payments of $275 on a $100,000 line of credit.

The draw period of this loan changed into the payback period after 10 years; for the next fifteen years, you must pay off the debt like you would a mortgage. However, you certainly didn’t anticipate that the $275 installment would balloon to a $700 one that may possibly go higher if the prime rate rises.

You may be able to save more than $100 a month by combining the two loans and lock in your interest rate rather than risk seeing it rise if prime increases. On the other hand, it’s possible that you desire to pay off the loans more quickly and might benefit from improved terms. Is it a good idea to consolidate in this way, and how does it work?

  Piggyback Mortgage Definition

Know What You’re Starting With

You need to grasp a few things about your existing debts in order to comprehend what occurs when you combine. If you discover that your second mortgage—also known as a cash-out loan—was used to withdraw cash from your property for whatever reason when you attempt to consolidate debts, it may increase the cost of the new loan and lower the amount for which you qualify. According to lenders, cash-out loans are more expensive since the borrower is statistically more likely to default on the loan if they run into problems.

The rate/term refinancing is another option (refi).Simply said, this form of loan is a change to the terms and interest rate of your present loan. Because the borrower isn’t keeping any money for himself or lowering the amount of equity they have in the property, the lender views the loan as being safer. Perhaps you recently refinanced when interest rates on mortgages hit an all-time low. A mortgage calculator is a useful tool for creating a monthly payment budget.

Why are these differences important? The conditions and the amount you would pay on new mortgages might be substantially different, says Casey Fleming, branch manager at Fairway Independent Mortgage Corporation and author of The Loan Guide: How to Get the Best Possible Mortgage.

“Let’s imagine you and your neighbor are both receiving refinancing loans with a 75% loan-to-value under the $417,000 conforming loan maximum (note: the cap has since been increased to $647,200). His is not a cash-out; yours is. As of April 2021, your loan would cost 0.625 points higher than your neighbor’s. Additionally, 1 point equals 1% of the loan amount, thus if your loan is for $200,000, you would have to pay $1,250 ($200,000 x.00625) more than your neighbor for the same interest rate.

  Up-Front Mortgage Insurance (UFMI) Definition

Consider it in this manner. The second mortgage was used to purchase the property, not to withdraw cash from it, therefore if you initially obtained the two loans when you purchased the house, it is not a cash-out loan. However, a new combined loan will be treated the same as a cash-out loan if you subsequently earned money as a consequence of taking out a second mortgage.

This divergence becomes significant for another reason. Since cash-out loans carry a higher risk for the lender than rate/term refinances, they could only provide 75% to 80% of your home’s equity. Fleming states it simply as follows: “You will need greater equity in your house to qualify if your loan will be termed a cash-out loan.

How to Consolidate

All of the challenging paperwork associated with loan consolidation will be handled by the lender. Being an educated consumer is your responsibility. Talk to multiple people instead of just one.

The best course of action is to individually chat with as many as three or four lenders since the consolidation of two loans is more involved than a conventional house mortgage. You might seek advice from your bank or credit union, a mortgage broker, or reputable business people in the field.

Of course, find out whether the new loan will be a rate/term refi or a cash-out loan. Is the loan at a fixed or variable rate? 15 years or 30?

After you decide on a lender, they will guide you through the procedure. Never sign anything before reading it, and be sure you are familiar with the payment plan.

  Mortgage Electronic Registration System-MERS Definition

According to Casey Fleming, there could be a method to change your loan from a cash-out loan to a rate/term refinance one year down the road.

“Consolidate the loans as a cash-out, but get a lender credit that covers all transaction fees. Wait a year before refinancing once again. It is not a cash-out loan at that moment since you are only refinancing one debt. Since you will hold the loan for a longer length of time, you may now spend money on points to reduce the interest rate. Fleming continues by advising against doing this unless you think interest rates will remain constant or even decline.

The Bottom Line

Never choose to refinance or combine your debts based only on the potential savings on your monthly payment. Most of the time, taking out a new loan will cost you more in the long run than just paying off your current debt, according to Fleming. “Millions of customers continue to mortgage their futures and wind up retiring with tens of thousands or even hundreds of thousands less.”

Instead, estimate the length of time you anticipate staying in the home and compare the expenses of your present mortgage(s) to the new mortgage as well as any additional expenditures for the new loan throughout the course of the loan’s tenure. Consolidation is definitely a smart move if it will reduce your total expenditures.

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