You may be carrying two mortgages for a number of reasons. One of the most common types of second mortgages is a home equity loan or line of credit that use equity you've built up to back a new loan. Then, you can use those funds for any number of reasons, from a remodel project to paying for a major expense like a wedding.
If you have two mortgages, you may want to consolidate them, depending on whether you would save more money and whether the move would help you meet your financial goals. Here's how mortgage consolidation works and whether it is right for you.
Key Takeaways
- Consolidating two mortgages into one could get you a lower interest rate or a shorter loan term, which can save you money.
- Refinancing from a variable-rate mortgage to a fixed-rate loan can provide predictably with loan payments.
- If you are considering consolidating loans, calculate you potential savings, factoring in any prepayment penalties.
- You may pay more in interest in the long-term if you consolidate mortgages to lower your monthly payment amount.
- Loan consolidation can make managing your loans easier.
4 Reasons to Consolidate Your Mortgages
Whether you are using a new mortgage lender or applying for a loan with your current lender, here are four reasons for consolidating:
1. Reduce Your Interest Rate
One main reason many people consolidate their loan is to lower their interest rate, which can save you money in the long-term. The lower the interest rate, the less you will pay in total over the whole term of the loan. Using a mortgage calculator can help you estimate these costs to see how they fit in your budget.
You could potentially get a lower interest rate if:
- Mortgage rates have declined since you took out your mortgages
- Your credit standing has improved
- Your adjustable rate mortgages have adjusted and increased your monthly payments
2. Eliminate the Risk of a Variable-Rate Mortgage
Payments are often lower at the beginning of a variable-rate mortgage, so you may purchase a home you can afford now, but not later. As the introductory period ends,you could find the new payment does not fit in your budget. Consolidating your mortgages into a single fixed-rate mortgage eliminates the risk that your payments will rise.
Consolidating to a fixed-rate mortgage from an adjustable rate one can be particularly good move when overall interest rates are relatively low.
Simply comparing monthly mortgage payments is not enough to determine which loan will save you the most money. You need to factor in the total interest payments over time.
3. Pay Off Your Loans Faster
Along with combining both loans into a single payment, some homeowners consolidate to have a shorter loan term. The total amount of interest you will pay is lower with a shorter loan term, and you will fully own the property sooner.
However, keep in mind that the monthly payments will likely be higher when you consolidate to a shorter loan term. For example payments on a 30-year fixed-rate mortgage with a 6% interest rate would be roughly $2,010.91 per month (with property taxes and homeowners insurance). With a 15-year mortgage with the same terms, your payment would be about $2,694.97, according to Investopedia's mortgage calculator tool.
4. Lower Your Payments
You may want to consolidate to lower the amount of your monthly payments if your budget is tight. You can do this by taking out a longer-term loan if you can't get a loan with a lower interest rate.
Keep in mind that decreasing the payment amount with a longer loan term will usually increase the amount of total interest you pay.
With this strategy, you will be putting less of your monthly payment toward your principal. Interest is front-loaded into most mortgages, which is why a smaller amount of your payment goes toward principal in the early years of a new mortgage.
What Is a Cash-Out Loan?
When you refinance a mortgage with a cash-out loan, you are essentially taking out the equity in the home and receiving it as a lump sum of cash. To do this, you borrow more money than you have equity in the home.
What Is a Loan-to-Value Ratio?
A loan-to-value ratio (LTV) is a ratio that lenders use to help them determine whether lending to you is a risk. It compares the amount of money you're borrowing to the value of the underlying asset. Lenders typically want a borrower to have a loan-to-value ratio of 80%, but some loan programs allow higher rates.
How Does a Piggyback Mortgage Work?
A "piggyback mortgage" is essentially a second mortgage that helps a borrower meet down payment requirements. For example, you may take out a main mortgage that requires a 20% down payment. So, you could use a "piggyback mortgage" to pay another 10% and then put down 10% of your own money. These second mortgages typically have higher interest rates.
The Bottom Line
If you consolidate your mortgages, make sure the move benefits you in the long run. Look at the total amount you will have to pay on the loan and the pace at which you will build up equity.Simply comparing payments is not enough to determine whether a consolidation is right for you. You also need to weigh the cost of interest payments.
FAQs
Consolidating two mortgages into one could get you a lower interest rate or a shorter loan term, which can save you money. Refinancing from a variable-rate mortgage to a fixed-rate loan can provide predictably with loan payments.
Is it better to combine two mortgages? ›
Combining your first and second mortgage can decrease monthly payments and interest rates substantially. Accunet can calculate your current finances and help you determine how much you'll see in savings by combining both mortgages into one new mortgage.
What is the 2 2 2 rule for mortgage? ›
A good way to remember the documentation you'll need is to remember the 2-2-2 rule: 2 years of W-2s. 2 years of tax returns (federal and state) Your two most recent pay stubs.
Should I talk to multiple mortgage lenders? ›
Contact at least three lenders on your list. Don't stop with just one lender! By exploring your options with multiple lenders, you get more information about your options and get a sense for which loan officers you might feel most comfortable working with.
Is it good to have 2 mortgages? ›
Advantages and Disadvantages of a Second Mortgage
These loans often come with low interest rates, plus a tax benefit. You can use a second mortgage to finance home improvements, pay for higher education costs, or consolidate debt. However, there are risks when taking out a second mortgage, and they can be substantial.
Does having two mortgages hurt your credit? ›
Most banks and private lenders also use credit to determine the interest rates for different borrowers. If you are wondering whether taking a second mortgage will hurt your credit, then the simple answer is No.
Is combining a first and second mortgage considered cash out? ›
If you have enough equity to keep your combined loans under 80% of the appraised value of your home this may work. There are some considerations however. If you're existing 2nd mortgage was not used to originally to purchase the home, it will be considered a “cash out” refinance and the lenders will charge a .
How much house can I afford if I make $70,000 a year? ›
One rule of thumb is that the cost of your home should not exceed three times your income. On a salary of $70k, that would be $210,000. This is only one way to estimate your budget, however, and it assumes that you don't have a lot of other debts.
How to juggle two mortgages? ›
Rent out the other home.
Being a landlord can be difficult, but it's also one of the best ways to get someone else to pay off the mortgage on your second home. If you don't live near your other home to handle maintenance issues, hire a property management firm to take care of the place.
What is the best mortgage rule? ›
According to the 28/36 rule, you should spend no more than 28% of your gross monthly income on housing and no more than 36% on all debts. Housing costs can include: Your monthly mortgage payment. Homeowners Insurance.
Different lenders use different multipliers, but a rough rule of thumb for single applicants is around 4 to 4.5x your income. If you are going to apply for a joint mortgage with someone else, lenders may use a different multiple, such as 3.5 to 4.
Does a preapproval hurt your credit? ›
A mortgage preapproval can have a hard inquiry on your credit score if you end up applying for the credit. Although a preapproval may affect your credit score, it plays an important step in the home buying process and is recommended to have. The good news is that this ding on your credit score is only temporary.
How many banks should I get pre-approved for a mortgage? ›
While there's no right number of mortgage lenders to get quotes from, the CFPB suggests contacting at least three. Having done your research beforehand, you'll be able to make a more informed decision as to which three (or more) you'd be comfortable working with.
Are second mortgages tax deductible? ›
Key Takeaways. Mortgage interest on a second home is tax deductible within the same limits as the mortgage on your first home. Property taxes paid on additional homes can also be tax deductible, regardless of the number of homes you own.
What are the disadvantages of getting a second mortgage? ›
Interest rates and fees
Second mortgages are riskier for lenders, so they charge steeper rates. You'd also pay a lower rate on a regular rate-and-term refinance or cash-out refinance. Second mortgages also come with closing costs, which you'll need to pay upfront when taking out the loan.
Do you need a down payment for a second mortgage? ›
On a second home, however, you will likely need to put down at least 10%. Because a second mortgage generally adds more financial pressure for a homebuyer, lenders typically look for a slightly higher credit score on a second mortgage.
Is it worth it to make double mortgage payments? ›
Making extra mortgage payments can help reduce interest as well as the term of your loan.
Is it better to have a joint mortgage? ›
When you take out a joint mortgage, you may able to borrow more than you would on your own. This is because lenders will look at how much you can afford between you when they decide how much to lend. It can also make saving for a deposit easier.
Can you have 2 home mortgages at the same time? ›
You can get at most two mortgages at the same time for your home in most cases. Depending on the lender you work with, the interest rates and requirements may vary. Also, instead of a second mortgage, you can go for a home refinancing to access more loans without taking on more mortgages on your property.
Is it a good idea to have two loans at the same time? ›
While multiple loans can be useful for covering large expenses, it can also have negative impacts on your credit score and finances.
