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See what's happening with home values in more than 400 metropolitan areas with HSH's Home Value Tracker, just updated though the second quarter of 2022.

See what's happening with home values in more than 400 metropolitan areas with HSH's Home Value Tracker, just updated though the second quarter of 2022.

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)
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AUG 18, 2022
A:

Mortgage rates fluctuate from day to day, depending on a number of factors related to the economy and to choices made by investors. While some mortgage money comes from deposits held by banks and credit unions, most of the funds for borrowers come from investors in capital markets.

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Mortgage rates are influenced by a variety of factors, rather than moving in lockstep with any one economic indicator. The stock market rises and falls for a wide variety of reasons, including global, economic and political issues, but as a broad rule of thumb, a rising stock market indicates optimism among investors about the economy.

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For the most part, this is a discussion about time. You should compare the total costs of the difference in the two interest rates over your given time horizon.

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