Refinancing in a time of rising rates and property values, part 3

While rising interest rates have sharply reduced the number of mortgage borrowers who can refinance into a lower rate, rising home prices create opportunities for some borrowers to refinance into mortgages that are less costly in other respects. Previous articles looked at refinancing a mortgage that is burdened by mortgage insurance, or by a second (“piggyback”) mortgage, into a new mortgage that has neither. This article considers a third option, which is to refinance in order to consolidate short-term debts.

This appears to be one of the most attractive options a mortgage borrower may have. Yet of the three approaches to refinancing considered in this series of articles, this is the trickiest and the easiest to get wrong.

Homeowners with one mortgage and high-cost, short-term debt can refinance that mortgage with cashout in an amount sufficient to pay off the short-term debt. (Note: “cashout” means that the new mortgage amount will be larger than the outstanding balance of the old one). Alternatively, they can take out a new second mortgage to pay off the short-term debt, and leave the first mortgage alone.

Homeowners who already have two mortgages along with shortterm debt also have two options:

⏩ They can refinance the second mortgage with cash out to consolidate the short-term debt, leaving the first mortgage alone.

⏩ They can refinance both mortgages into a new first mortgage that also includes the short-term debt.

Note that refinancing the first mortgage alone is not a good option because the first mortgage lender requires the borrower to obtain permission of the second mortgage lender, without which the second mortgage becomes the first mortgage. Getting permission can be a hassle.

I have two calculators on my web site designed to deal with these two situations. These are:

Calculator 1b: Debt Consolidation Calculator for Home Owners With One Mortgage.

Calculator 1c: Debt Consolidation Calculator for Home Owners With Two Mortgages.