The last ten or so years have seen significant changes in the mortgage sector. In the past, almost anybody could get a mortgage, even if it was for a large sum of money. Interest rates were higher at the time, but lending requirements were less stringent. Today, it is more difficult to qualify, and interest rates are just now beginning to rise from their record lows.
Perhaps you obtained a second mortgage, often known as a home equity loan, during a time when interest rates were high. That is only one of the reasons you could think about consolidating your debt. But ought you to? Do you understand it? Or would keeping the loans separate be preferable?
Four Reasons to Consolidate Your Mortgages
The following four reasons for combining are provided by Casey Fleming, a mortgage expert and independent writer and the author of “The Loan Guide: How to Get the Best Possible Mortgage.”
1. Reduce Your Interest Rate
Mortgage interest rates were substantially higher on average around 15 years ago. For instance, the average 30-year rate peaked at 6.74% in mid-June 2007. However, rates were less than half the rate in 2007 in July 2021, averaging 2.87%. A reduced interest rate might result in thousands of dollars in loan savings. The less you pay overall over the course of the loan, the lower the interest rate will be. A mortgage calculator may be a useful tool for creating a budget for these expenses.
- You may save a large amount of money if you have two mortgages by combining them into one with a lower interest rate or a shorter loan term.
- Concerns regarding your ability to make your mortgage payments later in the loan may be eased by refinancing from a variable-rate mortgage to a fixed-rate loan.
- As your loan resets to a longer term, consolidating to minimize your payments often results in longer-term costs for you.
2. Eliminate the Risk of a Variable-Rate Mortgage
Homebuyers could be persuaded into taking out a variable-rate mortgage since the first monthly payments are often lower than they will eventually be. After the promotional time expires, buyers can discover that the payment would soon become unaffordable for their family. You won’t have to worry about making a much larger payment later on in the mortgage if you combine all of your mortgages into one fixed-rate mortgage.
When interest rates are relatively low, it is a very wise decision. Even if last year may have been better, the present is still favorable. Since 2015, the Federal Reserve Board has increased mortgage interest rates nine times; however, the most recent increase was in December of last year, and no more increases are anticipated in 2019.
You should consider all the expenditures over time when refinancing instead of just comparing monthly mortgage payments since this is likely to result in you getting a terrible bargain.
3. Pay Off Your Loans Faster
Consider a shorter loan in addition to paying off both debts at once. You will pay less interest overall, and you will own the property or properties sooner. The monthly installments will undoubtedly increase.
Consider the $1,150 monthly payment for a 30-year fixed-rate mortgage on a $250,000 house as an example. If you convert it into a 15-year loan, the monthly cost soars to $1,811; but, over time, it will be less expensive since you would make fewer payments in 15 years than you would in 30 years and pay about $88,000 less in interest.
4. Lower Your Payments
This makes sense only when you are already in over your head. The issue is that, over time, lowering the payment amount frequently results in higher costs for you. Because the new loan nearly typically resets your payment schedule to a longer period and less of your payment will go to principle, Fleming claims that lower monthly payments “seldom entail reduced lifetime expenses—or even lower year interest rates.”
A lower portion of your payment goes toward principle in the first few years of a new mortgage since interest is often front-loaded into most mortgages. In the long term, resetting the loan results in higher interest payments. Serial refinancers struggle harder to pay down their mortgage because of this (s).
The Bottom Line
Make sure that consolidating your mortgages will help you in the long term before you do it. Consider the overall loan amount you’ll have to pay as well as the rate at which your equity will grow. Thinking just on the now is short-sighted. “No tool is utilized more often to persuade homeowners into terrible bargains than the monthly-payment comparison,” claims Fleming. Every year, it costs households millions of dollars and is too simple. The duration of the new loan should, in a perfect world, be the same as or less than the terms of the current loans.
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