Home loans can save you money if you consolidate

Interest rates are favorable for combining multiple loans into one

Home equity loans and lines of credit are among the most useful tools a homeowner can have. They are tax deductible, they offer flexible repayment and interest options, and they can be used for all manner of expenses. You can use one to remodel or add on to your home, buy a luxury vacation or recreational vehicle, or use one to pay off student loans. The loan is backed up by the value of your home and as your home increases in value, so does your ability to borrow against it. Home equity loans are great products.

There are times, however, when you may wish to prematurely retire an equity loan, and now may be such a time. Many such loans are issued with variable interest rates and these rates tend to be higher than the rates for fixed-rate mortgages. At the moment, market forces are working in such a way that the interest rates for short term and variable rate loans are increasing, while rates for long-term and fixed-rate debts are remaining stable. As a result, now may be a good time for homeowners with a first and second mortgage to consider an act of  debt consolidation by refinancing and combining two loans into one.

The ideal candidate for such a move would be a homeowner with a good, but not great, interest rate on his or her primary mortgage, and a home equity loan of substantial size at a higher, variable interest rate. The consolidation process would involve refinancing the home completely and having the lender issue a new mortgage. Here are some things to consider before taking action:

The cost of refinancing - It costs money to refinance, just as it costs money to buy a home in the first place. Refinancing costs include paperwork fees, origination fees, home appraisal fees, “points” paid to lower the interest rate and more. These fees can easily add up to several thousand dollars. Any homeowner who considers a consolidation move should consider whether he or she will remain in the home long enough to recoup these costs through lower payments. This can be calculated by dividing the cost of refinancing by the amount saved on each monthly payment. The resulting answer would be the number of months necessary to recoup the costs. If you do not plan to stay in the home at least that long, then refinancing isn’t for you.

Your interest rate on your first mortgage - if your rate is 7%, you’re a good candidate, but if it’s 5.5%, you probably aren’t. There’s no reason to refinance the entire home to save a bit on your second mortgage. If in doubt, ask your lender.

The amount of money owed on the equity loan. Larger is better. If you only owe $2,000, it’s not worth your while to spend $5000 refinancing your home. On the other hand, if you owe $50,000, it might be a good move. Again, ask your lender if you’re not sure. It won’t cost anything to find out and you may save thousands of dollars over the life of the loan.

Market conditions change all the time, but now is a good time to consider consolidation.