Opinions Please - Refi + Consolidate or Equity Loan

winker58November 19, 2005

Here my two choices:

Refinance my mtg to 6.5% and consolidate all other loans for a total monthly payment of $2,744 or

Continue with my monthly mtg ($1,859) and add on a home equity loan for 7.75% in the monthly amount of $538 (interest only)

What are thoughts on this???

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You should run the numbers to see which way is actually the least costly. Then after you know that you can consider other factors such as your ability to actually make payments, speed of paying off debt, etc.

Take the outstanding balance of your existing mortgage with the current rate of interest you have and figure out your current yearly interest. For example if your existing loan has a $250,000 balance and your current rate is 6 percent, you'd take 250,000 x .06. In that example the current yearly interest is roughly $15,000.

Then take the projected new balance after you add in the other debt plus refinancing costs and compare the yearly cost. Going back to this example, if you're going to add $85,000 of debt to your mortgage and go to a 6.5 percent rate, the new numbers would be an outstanding balance of $335,000 and an interest rate of .065, for a yearly interest cost of roughly $21,775.

In this case going with the home equity line would be slightly less costly, because that would cost you $6,456 a year in interest, whereas the refinance is going to cost you $6,775 a year in interest.

Of course, your own numbers may or may not work out that close. If the 6.5 percent mortgage represents a rate reduction over what you're payiing now, it's a lot more likely to be attractive to roll your debt into the first mortgage than it is if you have to go to a higher rate. And if you do go to a higher rate, how much higher you're going makes a big difference, too, in how these numbers actually are going to figure out in your own case.

A final factor to consider is how you actualy plan to pay off this debt. Paying interest only on a home equity line can buy you a few years of a lower payment, as compared to rolling all that debt into your first mortgage. Yet you're not actually retiring any of your debt, so that only makes sense if in the next few years you plan to sell your house and pay off the home equity line with part of the proceeds of the sale, or if you anticipate getting some other chunk of money in the next few years that will allow you to pay off that home equity line.

If you're going to stay in your house for a long time and will be paying off the outstanding debt little by little, refinancing the first mortgage probably makes more sense, because at least then your payments will be retiring some of the debt and not just paying interest. That's assuming, of course, that you can actually make that higher house payment without excessive difficulty.

    Bookmark   November 19, 2005 at 8:00PM
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There are a couple more "ifs" that I didn't mention above: If you would have no problem making the higher payment, and if you currently have a mortgage interest rate below 6.5 percent, take the home equity line.

Here's why: Above you said the new payment after refinance would be $2,744 and it's now $1,859. That's a difference of $885. If you paid that $885 a month on the home equity line plus the current $1,859 on your first mortgage, your total payment would be the same as with the refinance ($2,744), but in just a few years you'd have the home equity line paid down enough that you'd start saving a substantial amount of money on interest.

Of course, this makes even more sense if you plan to stay in your house a long time, because after about 12 years of $885 payments you'd have the home equity line paid off and your total payment then goes back to $1,859. Of course, even if you sell long before 12 years are up, you're still going to be money ahead by getting the home equity line paid down sooner, since that'll just be more money for you upon the sale of the house.

    Bookmark   November 19, 2005 at 8:19PM
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Hi winker,

Something else to consider ...

what was the origin of the other loans?

Some catastrophic medical issue, student loan, etc.

Or largely credit card or similar debt?

If you roll those other debts (usually short-term repay issues) into your home mortgage (long term repay), you'll quite likely take longer to pay off the total debt - as cowboyind suggested.

Especially if you plan to pay interest only on the second debt, for an extended period.

What may your future hold?

If you've been running up debt recently to cover regular ongoing expenses (i.e. spending more than you're making) is this likely to continue?

If so, down the road a piece you may have run up more (likely expensive) debt, and will you want to renegotiate your mortgage?


Do you expect some windfall income in the future, e.g. bequest on someone's death (not including potential lottery winnings), substantial increase in ongoing income, etc.

Basically, you've dug yourself a hole. One is covered by an asset - your house.

The other doesn't appear on the surface to be covered by anything.

So - have you been living beyond your means?

If so, some basic rethinking of your whole financial situation may well be in order.

And maybe I'm jumping to unjustified conclusions, here.

It's your issue, after all - and we know very little of the background.

Basically, I may choose to incur a debt in order to obtain an asset, especially one that may well appreciate in value - but I (almost entirely) refuse to go into debt to cover ongoing expenses.

If I can't live within my income now, how do I plan to not only do that, but pay off a loan next year that I've run up to cover living expenses now?

ole joyful

    Bookmark   November 20, 2005 at 1:46PM
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Joyfuguy: Living beyond means. Spending more than making. This is largely my fault and I need to stop the spending and start paying and find other ways of making myself happy. We do plan on living in our house for many years to come. It is not our first, so we have planned this house for the long term. No windfalls expected unfortunately. Hopefully my husband's company can stay afloat and he can keep his job. It's a very decent paying job and not so sure he would find one that pays that well.

Thank you all for the advice. Sometimes when it's your own situation it's hard to sit down and figure the numbers.

    Bookmark   November 24, 2005 at 2:25PM
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If you plan to stay in the house, I'd lean strongly toward the home equity line. You probably have a better rate than 6.5 percent right now on the house, and that's a nice thing if you plan to stay there for the next several years. If you combine all the other debt into a new first mortgage, you will be paying on it essentially forever, and the total interest you pay will be much more.

Just be careful not to run up additional debt once you do your consolidation; that's the biggest danger. Also, don't just automatically consolidate all your debts. For example, you may have car loans which are at a lower rate than 7.75 percent.

    Bookmark   November 24, 2005 at 9:44PM
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