How to combine two mortgages into one?

Having two mortgages isn't as rare as you think. People who accumulate enough equity in their homes can choose to take out second mortgages. You could use the money to pay off a debt, send a child to university, start a business or make a big purchase.

Let's look at an example: You took out an equity line of credit ten or more years ago, and during the draw period – the time when you could "draw" on your line of credit – you paid a manageable amount: $275 per month on a $100,000 line of credit.

Under the terms of this loan, after ten years, the draw period became the repayment period – the next 15 years in which you must pay off the loan as you would a mortgage. But you probably didn't expect that $275 payment to turn into a $700 payment, which could even increase if prime rates rise.

By consolidating the two loans, you could potentially save more than $100 per month and lock in your interest rate rather than watching it escalate as the Prime rises. On the other hand, you may want to pay off the loans faster and have better terms to help you do so. How does this type of consolidation work and is it a good idea?

Know what you start with

To understand what happens when you consolidate, you need to know a few things about the current loans you have. When you go to consolidate loans, realize that your second mortgage was used to pull money out of your home for some reason – called a payoff loan – it may add costs to the new loan and reduce the amount you qualify for. Lending loans are priced higher, lenders say, because the borrower is statistically more likely to walk away from the loan if they run into trouble.

Then there is the rate / term refinancing (refi). This type of loan is simply an adjustment to the interest rate and terms of your current loan. The loan is considered safer for the lender because the borrower is not collecting money or reducing the amount of equity in the property. You may have recently refinanced when mortgage rates fell to historic lows.

Why these differences are important? According to Casey Fleming, mortgage consultant at C2 FINANCIAL CORPORATION and author of "The Loan Guide: How to Get the Best Mortgage Possible," they are important because the terms and amount you pay for new mortgages can vary widely.

"Let's say you and your neighbor both get 75% loan-to-value refinance loans, under the conforming loan limit of 417.000 $. Yours is a payoff, it is not. Your loan would be 0.Cost 625 points more than your neighbor since April 2015. And 1 point is 1% of the loan amount, so if your loan amount is $200, 000, all things would be equal you pay $1, 250 ( $200, 000 x.00625) more for the same interest rate as your neighbor.

Think of it this way. If you originally purchased the two loans when you bought the home, it is not a cash-out loan because the second mortgage was used to purchase the home – do not pull cash out of it. But later, if you received money as a result of taking out a second mortgage, this was a payoff loan, and so a new consolidated loan is considered the same thing.

There is another reason why this distinction becomes important. Since cash-out loans are riskier for the lender, they can only borrow 75% to 80% of your equity in your home vs. 90% on a rate/term refi. Fleming puts it so clearly in English, "If your loan is considered a loan-to-value loan, you need more equity in your property to qualify. "

How to consolidate

The lender will handle all the complicated paperwork that comes with consolidating loans. Your job is to be an informed consumer. Don't talk to one lender – talk to several.

Since consolidating two loans is more complicated than a simple mortgage, it's best to talk in person with up to three or four lenders. You could talk to your bank or credit union, a mortgage broker, or referrals from industry experts you trust.

Ask them, of course, if the new loan will be a cash-out loan or a rate/maturity refi. Is it a fixed rate or variable rate loan? 15 or 30 years? (See Which is better, a fixed or variable rate loan?)

Once you are satisfied with a particular lender, you will be guided through the process. Don't sign anything without reading it first, and make sure you understand the payment schedule.

If your loan is a cash-out loan, Casey Fleming says there may be a way to convert it to a rate / term a year later.

"Consolidate the loans as a disbursement, but receive a credit balance that takes care of all the costs associated with the transaction. Wait a year and refinance again. Since you are only refinancing a single loan at this point, it is not a lending loan. Now you can spend money on points to lower the interest rate as you will keep the loan for a longer period of time. "Fleming recommends doing this only if you believe interest rates are stable or may fall. (You might also be interested in mortgage points: What's the Point? )

The bottom line

"Never opt to refinance or consolidate loans just because of the reduction in your monthly payment. In most cases, you will spend more over your life on the new loan than you would simply paying the existing loan, "says Fleming. "Millions of consumers are mortgaging their futures and reaching retirement age tens or even hundreds of thousands of dollars less. "

Instead, determine how long you think you will stay in the home and compare the cost of your current mortgage(s) to the new mortgage plus any costs associated with the new loan throughout the time you will be holding the loan.If costs were lower, consolidation is probably a good idea.