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.

Ask the expert
Keith Gumbinger
Keith Gumbinger
Mortgage Expert
Vice President, HSH.com
About Keith: Mortgage market observer and analyst with 35 years experience... (more)
Submitting your question...

Question received! Check back later to see if your
question gets published.

Q: Does the VA allow "asset depletion" mortgages?
SEP 20, 2018

Can you use private-sector retirement income and savings to help qualify for a VA-backed mortgage?

Read More
Q: How soon can I get another loan modification after my last one?
JUN 15, 2018

Getting another modification for an already modified loan is tricky, but it can be done in many cases.

Read More
Q: How long do I have to own or live in my home to qualify for the capital gains tax exclusion when I sell?
MAR 02, 2018

You can exclude capital gains on the sale of your primary residence if you meet the IRS's ownership and use requirements.

Read More