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Should I do a ‘consolidation refinance’?

Q: I have two loans; a fixed-rate first mortgage of $165,000 and a variable-rate $201,000 Home Equity Line of Credit at 3.5 percent. With mortgage rates likely to rise in the future, should I refinance to consolidate both of these loans into one new fixed-rate mortgage?

A: You can do it, but given where today's mortgage rates, you'll probably end up raising the cost of your debt, especially if you haven't got the cash to pay points and fees out of pocket to keep the rate at 3.5 percent.

If you haven't got the cash to pay the fees out of pocket, you'll expect to see a higher rate of perhaps 4.25 percent. So while you'll no longer have to worry about rates rising in the future, it will come at a cost, and your monthly payment will probably rise as a result.

You also need to consider whether your new loan will also cost you more due to the need for Private Mortgage Insurance (PMI). If your loan-to-value ratio is above 80 percent, you'll have a monthly mortgage insurance cost to consider in your calculations, too.

In effect, what you are doing is a "preemptive refinance" -- refinancing your variable rate debt to a fixed rate before interest rates rise. It's do-able, and while it will bring you peace of mind, it is unlikely to give you any kind of monetary savings, at least none you can actually count until rates begin to go up... and even then, it will be money you didn't spend rather than money saved, and if you pay costs out of pocket, you'll have to first "save" enough to pay for those costs even before any actual "savings" can occur.

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