How Much Will You Save by Refinancing Your Mortgage Loan?
Are you thinking of refinancing your home? Use our calculators to figure your monthly payments & discover how much equity you can withdraw. The page offers 3 separate calculators to help homeowners who are looking to cash out equity in their home.
- TAB 1 Cash out refi: Use this calculator if you knowhow many months you paid on your original loan & how much you would like to cash out. You do not need to know your current outstanding loan balance to use this calculator as it is automatically calculated using the loan's amortization schedule.
- TAB 2 Second mortgage consolidation: Use this calculator if you know the remaining balance on any first or second mortgages against the property which you wish to consolidate into a new loan. It does not require you know when the loans began. Entering the first mortgage is required, but entering a second is optional. This calculator also enables a homeowner to roll discount points & any other refinance costs directly into the loan.
- TAB 3 LTV limit: This allows you to quickly figure out the amount of equity associated with common loan-to-value limits & how much equity you can withdraw to reach that level given the outstanding balance on your current loans.
Current San Diego mortgage refinance rates are published under this calculator.
|Old Loan||New Loan With $50000 Cash Out|
$220,417.93Remaining Loan Balance
$270,417.93New Loan Balance with 83.21% LTV
$591,615.67Original Total Loan Cost
$173,992.52Remaining Interest on Old Loan
$476,060.44Interest Expense on New Loan
(plus $6,608.36 in closing costs)
$320.99Monthly Savings from Refinancing
$5,408.36Cost of Discount Points
$1,200.00Other Closing Costs
$6,608.36Total Closing Costs
Mortgage Consolidation & Refinancing Calculator
Use this calculator to see if it makes economic sense to refinance a mortgage or consolidate a first & second mortgage into a single monthly payment. This calculator will determine:
- the monthly payment for your new loan
- the net interest savings
- the number of months until you will break even on the closing costs
When entering your current loan information, please include the principal & interest (P&I) portion of your monthly payments. Do not include the escrow portion (property taxes & homeowners insurance) of the payments.
How Much Equity Can You Withdraw?
The amount of equity you can extract is determined by
- getting your home appraised;
- having a lender decide how much they are willing to lend; and
- subtracting what you still owe on the original loan.
If you have made improvements to your home, you will find that your house is worth more than when you bought it, and you can obtain more equity.
The ratio of the loan outstanding to the value of the property is referred to as loan-to-value (LTV) percent. If you put 20% down on a home then the amount still owed is 80%, giving the property an 80% LTV. If your house is worth $300,000 and you have it half-way paid off then that would mean your loan balance is $150,000 and your LTV is 50%. If you wanted to withdraw $60,000 of equity that would put the total amount owed at $210,000, giving you an LTV of 70%.
Through its supervisory role, the FDIC has the following underwriting limits in place, though banks may have tighter limits on particular loan types, loans or prospective borrowers.
|Loan category||LTV limit|
|Commercial, multifamily, and other non residential||80|
|1- to 4-family residential||85|
|Owner-occupied 1- to 4-family and home equity||90%*|
*A loan-to-value limit has not been established for permanent mortgage or home equity loans on owner-occupied, 1- to 4-family residential property. However, for any such loan with a loan-to-value ratio that equals or exceeds 90 percent at origination, an institution should require appropriate credit enhancement in the form of either mortgage insurance or readily marketable collateral.
As of August 2019, government sponsored loans backed by the USDA, FHA or VA have updated loan limits.
|Loan type||Old LTV limit||New LTV limit|
Snippets for news releases for the above changes are included below.
The U.S. Department of Housing and Urban Development (HUD) today announced joint policy actions designed to reduce risk associated with cash-out refinance lending. The changes preserve homeowners’ ability to convert home equity to cash via a government-sponsored mortgage but also improves the risk profile of HUD’s housing finance programs.
To address these concerns, the Federal Housing Administration (FHA) will lower its maximum loan-to-value (LTV) requirements for cash-out refinance transactions from 85 percent to 80 percent. This policy change will be effective for loans with case numbers assigned on or after September 1, 2019 and aligns with the maximum cash-out LTV allowed by the Government Sponsored Enterprises (GSEs).
Ginnie Mae issued All Participants Memorandum 19-05 (APM 19-05), which announces the implementation of changes to pooling eligibility requirements for Department of Veteran's Affairs (VA) -insured or -guaranteed mortgages. This APM revises the pooling eligibility requirements applicable to all VA-guaranteed refinance loans and establishes new pooling criteria for certain cash-out refinances with loan-to-value ratios exceeding 90%, as outlined in the agency's previously published Request for Information. Effective with mortgage-backed securities guaranteed on or after November 1, 2019, High LTV VA Cash-Out Refinance Loans (those with LTV ratios above 90%) are ineligible for Ginnie Mae I Single Issuer Pools and Ginnie Mae II Multiple Issuer Pools. The exception is in cases when the loans are Permanent Financing Construction Loans, as defined in Chapter 24 of the MBS Guide.
Calculate Cash Withdrawal for Common LTV Limits
Current San Diego Mortgage Refinancing Rates for a $200,000 Home Loan
The following table highlights current San Diego mortgage refinancing rates. The "Product" drop down menu allows you to select different loan durations & other related options.
Tapping Home Equity: Cash-Out Refis, HELOCs, & Home Equity Loans
Home equity is essentially how much of your house you can own. It is determined by taking your property’s current market value and subtracting the outstanding balance on your mortgage. The more mortgage payments you make, the greater home equity you build.
US Home Equity Levels
In Q3 of 2020, Attom Data Solutions reported that 28.3% or 16.7 million residential properties were considered equity-rich in the U.S. That’s around one out of four homes in the country. This means many Americans owed 50% or less on their property’s market value. Even with the global economic crisis caused by the COVID-19 pandemic, home equity rate in the U.S. increased from 26.5% in Q2 of 2020 to 28.3% in Q3.
Though home equity remains illiquid for years, it’s a substantial source of income that can be used in the future. This is possible through cash-out refinancing or taking out a second mortgage, such as HELOCs or home equity loans. People tap their home equity to fund important costs. You can use it to pay for home reconstructions, consolidate high-interest debts, or finance your child’s college tuition.
Our guide will walk you through the fundamentals of cash-out refinancing, HELOCs, and home equity loans. We’ll compare each option and discuss when it’s beneficial to take these types of loans. We’ll also explain when it’s a good idea to refinance and consolidate your first and second mortgage. Overall, our guide will help you understand refinancing and other ways to tap home equity while helping you boost savings.
What is Cash-Out Refinancing?
Cash-out refinancing allows you to refinance your mortgage into more favorable terms while borrowing more than you owe on your current loan. The difference between your existing mortgage balance and new loan is the amount you receive or cash-out. As a result, your new loan will be higher than your original mortgage’s oustanding balance.
Refinancing allows you to change the terms of your current mortgage with a new loan. You can shorten or extend your payment term, and score a better interest rate than your original mortgage. Thus, many homeowners take advantage of mortgage refinancing when market rates significantly fall.
Low Mortgage Rates & Refinancing Booms
According to New American Funding, before 2020, the prevailing U.S. mortgage rate has never dropped below 3.3% for 30-year fixed-rate loans. But as markets declined and unemployment increased due to the COVID-19 crisis, mortgage rates have fallen to historic lows. This spurred a mortgage refinancing boom. The trend predicts refinancing will continue to thrive throughout 2021.
In December 2020, the Federal Reserve announced it will keep the benchmark interest rate near zero until 2023. Meanwhile, Bloomberg reported that central banks around the world will maintain low interest rates throughout 2021 to help stimulate market recovery and growth.
When you initially took your mortgage, perhaps you got a high rate and now you want to change it. Maybe you want to shorten your term to further save on interest charges. Meanwhile, others may refinance to change from a government-backed mortgage into a conventional loan, or shift from an adjustable-rate mortgage (ARM) to a fixed-rate loan.
Refinancing allows you to eliminate the added cost of mortgage insurance premium (MIP) on certain government-backed loans, or lock in a fixed rate if you initially obtained an ARM. With refinancing, you can reduce your rate and shorten your term to boost savings.
Moreover, refinancing provides the option to borrow against your home equity and cash-out money. This increases your loan-to-value ratio (LTV), which is a risk assessment factor that measures the difference between your loan amount and your home’s current appraised value. Since you’re borrowing a higher loan amount, the lender takes on more risk when your LTV is higher. For this reason, cash-out refis typically come with higher interest rates than regular refinancing.
How Cash-out Refinances Work
To get a better idea, let’s take an example. Suppose your home’s current market value is $300,000 and you have a remaining balance of $150,000. With half of your house paid, you have an estimated home equity of 50%. Let’s say around this time, you need $50,000 to renovate your property.
Taking a cash-out refi can help you fund renovation costs. Doing home improvement also increases your property’s value, which helps restore your home’s equity. You can refinance your $150,000 mortgage into a $200,000 loan, which lets you cash out $50,000. Once the deal is closed and you receive your cash, and you pay for this loan according to the new terms on your refinanced mortgage.
When you take a cash-out refi, expect your monthly payment to change. It will also affect your total interest cost and LTV. In the following example, to be more specific, we’ll use the above calculator.
Let’s say your home’s price is $300,000 and you made a 20% down payment worth $60,000. You took a 30-year fixed rate mortgage at 5% APR, with an original loan amount of $240,000. Your monthly mortgage payment costs $1,288.37 (principal and interest payment). In this scenario, you’ve paid your mortgage for 10 years, leaving you with 240 more mortgage payments and a remaining balance of $195,220.95.
Now, with cash-out refinancing, you shorten your term to 15 years and reduce your rate to 3.8% APR. On top of this, you cash out $40,000. Using the calculator above, let’s find out your new monthly payment, LTV ratio, and the amount of money you can save.
- 30-Year Fixed-rate Loan
- Home Price: $300,000
- Down Payment: $60,000
- Original Loan Amount: $240,000
- Original Rate (APR): 5%
- Original Monthly Payment: $1,288.37
- No. of months left to pay: 240 months (20 years)
- Refinance Cash-out: $40,000
- Refinance Term: 15 years
- Refinance Rate (APR): 3.8%
|Loan Details||Original Mortgage (Old)||Refinanced with Cash-out (New)|
|Loan Balance||$195,220.95 (65% LTV)||$235,220.95 (78.41% LTV)|
|Total Loan Cost||$463,813.88||$310,155.65|
|Interest Cost||$113,988.30 (Remaining)||$73,734.69 (includes $1,200 closing cost)|
|Savings by Refinancing||n/a||$39,053.61|
*This calculation did not include escrow costs.
Based on the results, if you refinance today at 3.8% APR with a 15-year term, and cash-out $40,000, your monthly mortgage payment will increase to $1,716.42. That’s higher by $428 compared to your original mortgage. And since you cashed out $40,000, your LTV increased to 78.41% from 65%.
On the other hand, your total interest costs will be lower at $73,734.69 compared to your original interest cost of $113,988.30. In this example, you’ll save a total of $39,053.61 on interest charges when you refinance into a shorter term with a cash-out.
When you reduce your term, your monthly mortgage payment usually increases. That said, make sure you can afford the higher monthly payment before refinancing to a shorter term. The example added $428 to your monthly mortgage payment. Consider if you can afford this increase before choosing a 15-year term. Securing a low enough rate or cashing out a lower amount will help you secure a more affordable mortgage payment when you refinance.
As a rule, financial experts recommend refinancing 1 to 2 percentage points lower than your original rate. The lower the rate you obtain, the more you can save on interest charges. This also recoups the closing costs of refinancing much faster. That said, it makes sense to refinance your mortgage if you intend to stay for a long time in your home.
Don’t Forge the Closing Costs
Taking a cash-out refi involves hefty expenses. Closing costs for refinancing can range between 3% to 6% of your loan amount. If your remaining loan is worth $200,000, this means your closing costs can be anywhere from $6,000 to $12,000. According to Closing Corp, the average US refinance closing cost in 2019 was $5,779. It’s a substantial fee, so prepare your finances before deciding on this type of loan.
Refinancing expenses are also impacted by mortgage points. Consider the following types of mortgage points and how they can help you save before refinancing:
- Origination Points: Fees paid for the processing, evaluation, and approval of your mortgage are based on origination points. This is charged by lenders to compensate their loan officers. It’s based on a percentage of the loan amount, which usually costs from 0.5% to 1%. Origination fees can be negotiated with your lender, so try to reduce it to save on refinancing.
- Discount Points: These are upfront fees you pay to your lender to reduce the interest rate on your mortgage. It’s most beneficial if you intend to stay long-term in your home. A discount point is equal to 1% of the loan amount. For example, 1 point on a $200,000 loan is $2,000, a half point is equal to $1,000, and a quarter point is equal to $500.
Discount points vary per lender and are offered during closing. While these can be rolled into your mortgage, it’s better to pay for them upfront. Rolling discount points into your mortgage increases your loan amount. It will also take longer to reach the breakeven point, which is the time it takes to offset the cost of refinancing.
Adverse Market Refinance Fee
Due to the economic crisis brought by the COVID-19 pandemic, the global economy plunged into a recession in 2020. Government-sponsored enterprises’ (GSE) Fannie Mae and Freddie Mac lost an estimated $6 billion. As a response, in August 2020, both GSEs required mortgage lenders to impose a 50 basis point Adverse Market Refinance fee.
Initially set for September 1, 2020, it was officially moved to December 1, 2020 to cushion the shock on mortgage lenders. Refinances with balances equal to or below $125,000 are exempted from this fee, including VA and FHA refinances. Consider this extra cost before refinancing your mortgage.
Cash-Out Refinancing Requirements
Like traditional mortgages, you must satisfy certain financial requirements to be eligible for a cash-out refi. Make sure to meet the following qualifications before you apply:
- Enough Home Equity: To obtain a cash-out refi, lenders generally prefer borrowers with at least 20% equity in their home. This means your LTV ratio should not exceed 80% of your property’s market value, though other lenders may allow 85% LTV. Note that the standards vary per lender, and the requirement may change depending on current market conditions. Some lenders may increase your LTV limit if your cash-out refi is used for home improvement.
- Debt-to-income Ratio (DTI): Lenders impose a back-end DTI ratio between 40% to 50%. Back-end DTI compares your total monthly debt obligations with your gross monthly income. Having a low back-end DTI means you have enough incomes to afford your monthly mortgage payments. It indicates lower risk of defaulting on your loan. Thus, a lower DTI improves your chances of securing loan approval.
- Credit Score: Most lenders require a credit score of at least 620 to qualify for a cash-out refi. But don’t stop there. A higher credit score makes you eligible for more competitive rates. Before applying for any loan, make sure to improve your credit score. You can do this by making timely payments, paying off large debts, and keeping your credit card balances low.
Cash-Out Refi Credit Scores for Government-Backed Loans
FHA Loans – Borrowers must have a credit score of 580 to apply for cash-out refinancing. However, note that many FHA-sponsored lenders favor borrowers with credit scores of 600 and 620. For regular mortgage refinances, borrowers are approved with a credit score of 500. You can obtain a cash-out refi through the FHA streamline refinance program.
VA Loans – These are loans solely granted to active military, veterans, and qualified military spouses. Though the VA has lenient credit requirements, most VA-sponsored lenders prefer a credit score of 620 and above. Borrowers who currently have a VA loan can take advantage of the Interest Rate Reduction Refinance Loan program (IRRRL).
USDA Loans – The USDA program only offers rate and term loans for mortgage refinancing. They currently do not grant cash-out options for borrowers. You can refinance your mortgage through the USDA streamlined-assist refi program. Note that USDA refi applications are not based on credit scores. However, your income should not go beyond the prescribed income limit for your area. To qualify, you must have paid your mortgage for at least 12 months before refinancing.
Lenders must also submit the following documents to apply for cash-out refinancing:
- Pay stubs from the last 30 days
- Tax returns, W-2 and 1099
- 1 year of bank statements
- Latest credit report
- Latest home appraisal
Refinancing requires similar documentation as purchase mortgages. Thus, consider refinancing with the same lender to make it more convenient. It’s also easier to score a better rate and term when you refinance with your original lender.
How Much Can You Cash-Out?
Homeowners can only borrow a certain amount of equity when they refinance. The exact amount of equity you can withdraw is determined by:
- your home’s current appraised value,
- how much a lender is willing to lend,
- and subtracting what you still owe on the mortgage.
If you’ve made improvements to your home, you’ll find your house is worth more than when you bought it. This means you can obtain more equity.
For conventional loans, lenders generally allow you to borrow between 80% to 90% of your home’s value. As for government-backed loans, there are specific LTV limits for cash-out refis. In August 2019, the U.S. Department of Housing and Urban Development (HUD) announced lower LTV limits for mortgages backed by the Federal Housing Authority (FHA) and the U.S. Department of Veterans Affairs (VA).
According to the update, the FHA only grants cash-out refinances up to 80% LTV. Prior to the announcement, the allowed LTV limit was 85%. Meanwhile, the VA now grants cash-out refinancing up to 90% LTV. Before the update, VA loans were known to offer 100% LTV on cash-out refis. The lower LTV limits were implemented to help reduce lending risk among HUD’s home loan programs.
The Federal Deposit Insurance Corporation (FDIC) also keeps the following underwriting limits in place. Depending on prospective borrowers, banks may have tighter limits.
|Loan category||Loan-to-value limit (percent)|
|Commercial, multifamily,2 and other non-residential||80|
|1- to 4-family residential||85|
|Owner-occupied 1- to 4-family and home equity||90%*|
To understand how LTV limits affect your cash-out, here’s an example. Suppose you took a 30-year fixed mortgage worth $300,000 at 5% APR. You’ve paid the mortgage for 10 years and the remaining mortgage balance is $195,220.95. Over the years, you’ve made improvements on your home, increasing the current market value to $350,000.
If you take a cash-out refi, how much can you borrow if the LTV limit is 80%? Using the LTV calculator above, the following results show different LTV limits with their corresponding maximum debt amount and credit limits:
|% of Appraised Value||Max Debt Amount||Less Existing Loans||Your Credit Limit||Remaining Home Equity|
Based on the results, notice how the debt amount increases as you withdraw higher credit. In this example, if the required LTV limit is 80%, you can withdraw a maximum of $84,779.05. This increases your loan amount to $280,000.00, while reducing your home equity to $70,000. As a rule, avoid withdrawing more money than you need. If you can do with 70% LTV, you can cash out $49,779.05. This puts your debt amount at $227,500.00, while leaving you with more home equity at $105,000.00.
Avoid Drawing Over the Limit
To avoid withdrawing too much home equity, decide how much money you need to borrow. Like traditional mortgages, with a cash-out refi, you are required to pay private mortgage insurance (PMI) if you borrow more than 80% of your home’s value. PMI is an added cost on top of your monthly mortgage payments. Taking a large credit is harder to pay back. Make sure you have stable income and enough funds to afford your loan. If you fail to make payments, you run the risk of losing your home to foreclosure.
How long does processing take? Cash-out refinances usually take around 45 to 60 days of processing from the date of application. However, this depends on your lender. Getting a home appraisal from a third-party home inspector can make the process longer. To avoid delays, have your appraisal prioritized so it doesn’t take too long.
When do I receive the cash-out? Borrowers don’t receive their cash right away after closing. According to the Truth in Lending Act, lenders must provide a three-day grace period for borrowers in the event they cancel the loan. This is enough time to go over your finances in case you change your mind. Otherwise, you’ll receive your money after three days or so of closing.
Get Tax Advantage
Upon refinancing, borrowers can benefit from mortgage interest deductions. It’s a kind of tax deduction granted to help lower interest payments on mortgages. However, you can only qualify if you use your loan to construct, buy, or renovate a home. If you took a cash-out refi to expand your property, you’re entitled to this tax incentive. But if you use it for other expenses, such as debt consolidation or medical costs, you won’t qualify for deductions.
Prior to the Tax Cuts and Jobs Act 2017, borrowers were allowed to deduct interest on the first $1 million of their loan, and $500,000 if they’re married or filing separately. But for now, borrowers can deduct mortgage interest on the first $750,000 of their loan. Meanwhile, those married or filing separately can deduct mortgage interest on the first $375,000 of their loan. The mortgage deduction limit is scheduled to revert to $1 million after 2025.
When Should You Take a Cash-out Refi?
Cash-out refinancing is a viable option if you want to borrow a substantial sum while refinancing your mortgage with more favorable terms. It’s ideal when market rates are significantly low. If you’re keen on changing your rate or loan term, this option will work for you. On the other hand, if you’re just looking to borrow money, you should look for other loan options. There’s no point in refinancing your mortgage (and going through a costly and time-consuming process) especially if you’re happy with your existing loan.
As a benefit, cash-out refis generally have lower interest rates than unsecured debts such as credit cards and personal loans. For example, as of January 7, 2020, the interest rate for 30-year fixed-rate mortgages is 2.929%. Meanwhile, the average credit card rate in January 6, 2020 is 16.05%, while rates for 3 to 5-year personal loans were around 5.99%. That’s a big difference in interest charges. While credit cards allow you to access revolving credit, it’s difficult to pay it back when you incur high-interest debts. And though personal loans get faster approval, a refinanced mortgage can provide you more time to pay off your debt.
On the other hand, qualifying for cash-out refis is generally harder than regular refinancing. Consider the strict requirement process to obtain approval. You must have a credit score of 620 and above, and at least 20% equity on your home. Depending on your lender, many prefer a back-end DTI ratio no more than 43%. The process also takes time, around 45 to 60 days before you receive your cash. So if you need money right away, you’ll need to look for other financing options.
Be Careful Consolidating Your Debts
People also use cash-out refinancing to consolidate high-interest debts. The low rate can help manage your credit card bills and eventually clear out your balance. However, this is a risky move, especially if you keep incurring large credit card balances again. If you cannot afford to commit to a budget plan, do not consolidate debts with your home as collateral. You’ll risk losing your home to foreclosure.
Taking a Second Mortgage: Home Equity Loans & HELOC
There are other ways to tap your home equity. This is done by obtaining a second mortgage such as HELOCs or home equity loans. A second mortgage is a loan you take against property that already has a mortgage. It uses the equity in your home as collateral to borrow money. While cash-out refinancing replaces your original mortgage, a second mortgage entails making separate monthly payments to another lender. It’s an entirely different loan from your first mortgage.
When borrowers default on their mortgage, second lenders are only paid back once the original lender gets their share. For this reason, second mortgages typically come with higher interest rates than cash-out refis. But as an advantage, HELOCs and home equity loans have more affordable closing costs.
When Should You Get a Second Mortgage?
Taking a HELOC or home equity loan works if you want to tap your home equity without changing your current mortgage. You must also be willing to make two separate mortgage payments each month for the rest of the loan. And as a tradeoff for keeping your original mortgage, you must pay a higher interest rate for your second mortgage.
Furthermore, you get to choose how to access your money. If you want to withdraw money as needed through a revolving credit, you can opt for a HELOC. But if you want to receive a one-time lump-sum cash, you can choose a home equity loan. Many borrowers with second mortgages tend to take a revolving credit line. Around 90% of all second mortgages are structured as HELOCs.
Home Equity Line of Credit (HELOC)
A HELOC functions much like a credit card, allowing you to withdraw money through a revolving credit line. This flexibility lets you borrow money against your home equity as needed. You can only withdraw cash up to an approved limit while paying interest against credit you owe.
HELOCs come with a draw period, which usually runs for 10 years. During this time, you must make interest and principal payments. Once the draw period ends, you are no longer allowed to take more credit. You must repay the rest of the loan during the remaining years of the term.
Moreover, HELOCs are structured with adjustable interest rates. This means your loan’s rate will change depending on current market conditions. Thus, you must be ready to make larger payments when your rate increases. HELOCs have rate caps that limit how high your APR can increase, which keeps payments manageable. But think of this drawback, especially if you’re using a HELOC for 20 years. If you’re not comfortable with unpredictable payments, it might be better to take a home equity loan instead.
HELOCs do not typically charge closing costs, but may require you to pay around $300 to $400 for a home appraisal. And to keep your account active, lenders usually charge a $100 annual fee.
Home Equity Loan
With a home equity loan, you receive your money as a one-time lump sum fund. If you need a specific amount to cover short-term expenses such as medical bills or home repairs, it’s a viable option. But because it’s a one-time cash-out, you must borrow enough money to cover intended expenses. This limitation may look unattractive to other borrowers, so they take a HELOC instead.
However, home equity loans provide the advantage of stable payments. It comes with fixed mortgage rates, which means your monthly payments will stay the same for the rest of the loan. These terms can last as long as 5, 15, or 30 years. Even if market rates increase over time, you don’t have to worry about making larger payments. It ensures you can afford your loan and pay it within the agreed term.
For people who don’t need a large sum for extended expenses, consider a home equity loan. If you’re borrowing a definite amount and want predictable loan payments, this will work for you. And compared to HELOC, you won’t be tempted to withdraw more credit.
Home equity loans typically require 2% to 5% closing costs based on the borrowed loan amount. For example, if your loan is $30,000, your closing cost will range between $600 to $1,500.
Consolidating Your First & Second Mortgage
If you’ve taken a second mortgage, it’s possible to refinance it with your first mortgage. This process is referred to as mortgage consolidation refinancing. It’s ideal for homeowners who want a better rate or term (or both) for their original mortgage. When you refinance, you can roll in your second mortgage to combine both loans into one loan. As a result, instead of making two payments, you revert to one mortgage payment each month. You can also cash-out money when you refinance to consolidate your mortgage.
As a rule, mortgage consolidation refis should only be done when interest rates are low. Your interest rate must be lower than your first and second mortgage. Securing a reduced rate guarantees interest savings for the life of the loan. And since you no longer have to deal with two mortgage payments, it streamlines your budget and makes payments easier to follow.
You can consolidate your first and second mortgage right after opening your second mortgage. Lenders generally allow borrowers to consolidate their mortgage if they have not withdrawn credit in the last 12 months. Not drawing money from your HELOC helps reduce your LTV by 20%.
How long is the processing time? Unlike traditional refinancing, mortgage consolidation refis may take longer to process. Some lenders have a waiting period of around 12 months to process your application after your second mortgage is approved. They also require thorough evaluation of your credit history, which makes it a lot longer.
Estimating Mortgage Consolidation Refinances
Before consolidating your mortgage, you can determine your new monthly payment using the above calculator. It also indicates how much you can save, as well as how long you should stay in your home to offset refinancing’s closing costs.
Let’s take an example. Suppose your original mortgage is a 30-year fixed-loan with a remaining balance of $150,000 at 6.8% APR. Your monthly payment is $1,200 (principal and interest). Meanwhile, your second mortgage balance is $50,000 with an 8% APR, and a monthly payment of $700 (principal and interest). Your total mortgage payment per month amounts to $1,900.
You intend to refinance both mortgages into a 15-year term at 3.2% APR. On top of this, you’re cashing out $50,000. Using the calculator above, we estimated how much your refinanced mortgage payment will be and how much you can save. See the results below.
- First Mortgage Balance: $150,000
- Monthly P&I payment: $1,200
- Rate of first mortgage: 6.8%
- Second Mortgage Balance: $50,000
- Monthly principal & interest payment: $700
- Rate of second mortgage: 8%
- Refinanced rate: 3.2%
- Refinanced term: 15 years
- Cash-out amount: $50,000
- Closing costs: $3,500
|Mortgage Consolidation Refinance||Amount|
|New Monthly principal & interest payment||$2,100.72|
|Monthly payment change||Increased by $200.72|
|Months before interest savings offset closing costs||6 months|
|Remaining interest under old mortgages||$129,785.73|
|Total interest expenses after refinancing||$78, 130.25|
|Interest saved after refinancing||$51,655.48|
*This calculation did not include escrow costs.
Based on the results, when you consolidate your first mortgage at 6.8% APR, and your second mortgage with 8% APR, your monthly payment will increase by $200.72. The refinanced monthly payment will amount to $2,100.72. Though your payment is higher, you will save a total of $51,655.48 in interest charges over the life of the loan. But in order for your refinance to yield any savings, you need to stay in your home for at least 6 months. That’s how long it will take to breakeven and recoup the closing cost of refinancing.
When is Mortgage Consolidation a Bad Idea?
Though mortgage consolidation has many benefits, there are certain conditions when it’s not favorable. Generally, consolidating your mortgage is not ideal if you cannot obtain a low enough rate. Doing so will likely cost more money and cancel any savings. Avoid consolidating your mortgage under the following circumstances:
- When you’ll soon pay off your mortgage. If your mortgage only has several years left to pay, such as 10 years or less, do not consolidate your mortgage. This will needlessly extend your term, resulting in higher interest charges.
- When your current mortgage has a lower rate. Perhaps your first and second mortgage already have low rates. If you cannot get a lower rate or at least match your existing rate, consolidating your mortgage will not be a good idea. Higher interest rates will only increase your monthly payment and overall interest costs.
- If refinancing requires PMI. Under refinancing, private mortgage insurance (PMI) is mandatory if your LTV is over 80%. This extra cost takes around 0.5% to 1% of your loan amount each year. It cancels potential savings you gain from obtaining affordable mortgage payments.
When Mortgage Consolidation is Favorable
Under the right conditions, you may gain sizeable savings if you merge your first and second mortgage. The following are the benefits of consolidating your home loans:
Reduce Your Interest Rate
As previously mentioned, refinancing is most beneficial when market rates are low. When you took your first mortgage, rates were likely a lot higher compared to the present time.
For example, if you took your mortgage 15 years ago, the average rate for a 30-year fixed mortgage in January 2006 was 6.22% APR, according to Freddie Mac. In contrast, the average 30-year fixed-rate loan as of January 7, 2021 was 2.65% APR, based on data from the Federal Reserve. Thus, refinancing now will help you obtain a significantly lower rate. And when you refinance after 15 years, you’re essentially getting the same 15-year term to pay off your loan. A 15-year fixed-rate loan in January 7, 2021 has an average rate of 2.21% APR.
To give you an idea, let’s say your original mortgage balance is $150,000 at 6.22% APR. Your second mortgage has a $40,000 balance at 7.5% APR. Your first mortgage comes with a monthly payment of $1,600, while your second payment has a monthly payment of $700, for a total of $2,300. If you keep your current mortgage, your total interest cost will be $55,935.23.
On the other hand, if you consolidate your mortgage into a 15-year term at 2.5% APR, your monthly payment will decrease to $1,002.85. This is more affordable by $1,297.15. Finally, your overall interest costs will be reduced to $30,113.17, which saves you a total of $25,822.05 in interest charges. This example shows its ideal to refinance your first and second mortgage at the present time.
Shift from an ARM to a Fixed-Rate Loan
If you have an adjustable-rate mortgage (ARM) or a HELOC, you can refinance your first and second mortgage into a fixed-rate loan. This allows you to lock in a reduced rate, especially if market rates are continuously rising. You don’t need to worry about increasing monthly payments in the future.
For example, if you have a HELOC, your monthly payment may start at $500 with a $100,000 credit line. After the draw period, if market rates continue to rise, your monthly payment may increase to $800. But if you consolidate your first mortgage and your HELOC into a fixed-rate loan, it ensures your rate and monthly payments will stay the same.
Shorten Your Payment Term
Refinancing your first and second mortgage allows you to reduce your current payment term. This shaves years of interest charges, which helps you gain more savings. But before you shorten your term, be sure you can afford your new monthly payment. Depending on your rate and remaining balance, your new mortgage payment may be higher or lower.
For example, you’ve paid off your 30-year fixed rate mortgage for 10 years. You also took a second mortgage which you must pay for the remaining 20 years. If you consolidate your first and second mortgage (no cash-out), you can pay your loan sooner by 5 years. Here’s an example below:
- First Mortgage Balance: $200,000
- Monthly principal & interest payment: $1,200
- Rate of first mortgage: 6%
- Second Mortgage Balance: $40,000
- Monthly principal & interest payment: $700
- Rate of second mortgage: 8%
- Refinanced rate: 3.2%
- Refinanced term: 15 years
- Closing costs: $3,500
|Mortgage Consolidation Refinance||Amount|
|New Monthly principal & interest payment||$1,680.58|
|Monthly payment change||Decreased by $219.42|
|Months before interest savings offset closing costs||7 months|
|Remaining interest under old mortgages||$241,620.17|
|Total interest expenses after refinancing||$62,504.20|
|Interest saved after refinancing||$179,115.97|
*This calculation did not include escrow costs.
Based on the results, if you consolidate your first mortgage (6% APR) and your second mortgage (8% APR) into at a single loan at 3.2% APR, your monthly mortgage payment will decrease by $219.42. This saves you $179,115.97 in interest charges over the life of the loan. But for your refinance to reap any savings, you must stay in your home for at least 7 months. This is how long it will take to break even on the closing costs of refinancing.
In this example, your monthly payment becomes lower when you consolidate your first and second mortgage. It also cuts 5 years off your original term.
Home equity is a valuable source of wealth that can be accessed through different types of home loans. It’s calculated by subtracting your mortgage’s outstanding balance from your home’s current market value. The longer you make mortgage payments, the more home equity you gain. Tapping home equity allows you to fund major home renovations, consolidate debt, and even finance your child’s college education.
Once you have enough home equity, you can access it through cash-out refinancing or taking a second mortgage, such as a home equity loan or HELOC. If you obtain a second mortgage, you have the option to refinance it with your original mortgage into one new loan. Each option allows you to withdraw up to a certain amount of equity, which is based on your loan-to-value ratio (LTV). LTV compares your loan amount against the current market value of your property.
Refinancing is basically changing your existing mortgage and replacing it with more favorable terms. It can help you gain substantial interest savings by reducing your rate and shortening your payment term. When you take a cash-out refi, you borrow more than your currently owe on your home. The difference is the amount given to you as the cash-out.
Before you take a cash-out refi or consolidate your mortgage, make sure you can afford the closing costs. This can range from 3% to 6% of your loan amount. You should also estimate how much your payment will change (which can increase) so you can prepare your finances.
You can also access home equity by taking a HELOC or home equity loan. Though these options have higher interest rates than a cash-out refi, they come with lower closing costs. These are also better options if you want to keep your current mortgage rate and term. As a tradeoff, you must make two separate mortgage payments each month.
When you tap your equity, make sure to use it wisely. It’s ideally used for home improvements to restore equity into your home. If you’re using the money to fund an expensive vacation or buy a car, it won’t give you any returns. Be sure to use it on important expenses and worthwhile investments. Finally, avoid taking more credit than you need. This leaves you with larger debt that’s more difficult to pay in the long run.
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