Q-We are considering refinancing versus taking out a home equity loan or a second mortgage. We want to pay off our credit cards and auto loan. How do we determine which way to go?
A-Paying off those debts with a mortgage can be an excellent strategy. You are probably paying 18 percent to 21 percent for the credit cards and 9 to 12 percent for the auto loan. Their interest is not tax deductible as it usually is with a mortgage.
Second mortgages or home equity loans will always have a higher interest rate than a first or refinanced mortgage. This is because they are a higher risk proposition for the lender.
When refinancing your existing mortgage, the new mortgage is considered as the ”first” to financial institution. There are, however, additional costs associated with refinancing versus a home equity loan, although home equity loans may offer better tax advantages than refinanced mortgages.
Typically in refinancing, a consumer should expect to pay the same types of closing costs as when they first bought the home. Exceptions in closing costs may be in the elimination of city, county and state transfer fees. Also, occasionally fees for private mortgage insurance may be eliminated if the refinanced mortgage is 80 percent or less of the new appraised value.
The general rule for refinancing is do it if your current interest rate is 1 to 2 percent over the new rate and you intend on staying in the home for three years or more.
For example, if your existing $150,000, 30-year fixed-rate mortgage is at 9.5 percent and you want to refinance at 8 percent, the monthly mortgage payment difference would be $160.63. The monthly payment would fall from $1,261.29 to $1,100.66.
Therefore, you would have to calculate how long it would take to recoup $5525 at $160.63 a month, or about 35 months. An increasingly more common strategy for homeowners is to refinance their 30-year fixed-rate mortgage with a 15-year mortgage.
