Consider consolidating your mortgage and home equity

Bankrate.com

Homeowners have another opportunity to take advantage of a mortgage rate fire sale these days as a variety of economic factors and the Federal Housing Finance Agency’s decision to eliminate the refinance fee are all coming together to push the mortgage market back down.

One strategy for benefiting from these conditions could be to refinance your mortgage and wrap any home equity debt you have — like a home equity loan or a home equity line of credit (HELOC) — into the new loan. Here’s why doing that could save you money in the long run.

Mortgage interest rates are generally lower than those on home equity products, and with mortgage rates poised to fall even further in the near term, it’s a great chance to scale back your higher-interest debt.

For now, Federal Reserve policy is meant to promote low interest rates, but most experts expect that to shift as the COVID recovery continues.

“When the Fed does start raising rates, the first rate to go up is the home equity rate,” said Melissa Cohn, executive mortgage banker at William Raveis Mortgage. “Your home equity loan has only one way to go: up.”

Home equity loans and lines of credit are more susceptible to fluctuations in the market, because those products tend to have adjustable rates, while primary mortgages more commonly have their interest fixed at a single rate over the life of the loan.

“We’re in the final innings of this extraordinary low-rate environment,” Cohn said, so borrowers with adjustable-rate loans have only a matter of time before their payments start going up. “Wouldn’t you want to refinance your whole loan to a mortgage where your rate is secure?”

How does the end of the refinance fee affect this consolidation strategy?

“It’s huge,” Cohn said. “You got the gold ring on top of it. Not only have bond yields dropped, but so has the cost of borrowing because we got rid of that fee.”

The refinance fee of 0.5% of the loan’s balance was levied on most mortgage overhauls since the start of the COVID-19 pandemic. It applied to conforming loans held by Fannie Mae and Freddie Mac, with a principal balance of at least $125,000.

The end of the fee on Aug. 1 will make it easier for borrowers to consolidate their debt, especially if doing so would have put them on the wrong side of that $125,000 threshold. The fee was paid by lenders, and many of them chose to pass just some of the cost on to borrowers, so it’s not clear if anyone will see the full half-point in savings when they refi.

The easiest way to consolidate your mortgage and home equity debt is to do a cash-out refinance of your primary mortgage, and use the extra funds to pay off the balance you’re carrying on your HELOC or loan.

Check out Bankrate’s mortgage refinance calculator to see how much you might be able to save.

If you have enough equity in your home, you may be able to keep the line of credit open, even after paying it off, according to Cohn.

“The benefit of a home equity loan is that it gives it access to your home equity at a moment’s notice,” she said. “You may not be required to close it out.”

For homeowners, a HELOC can be a great source of emergency cash if unexpected major expenses pop up, in addition to being a smart way to fund home improvement projects.

Keep in mind that if your lender does require you to close out your HELOC, which many probably will as part of a refinance, you’ll no longer have access to that equity unless you choose to open another line of credit later on.

Mortgage rates are heading down again, and while the historic lows won’t last forever, the trend is giving borrowers renewed opportunities to benefit. If you haven’t already refinanced, or if you’re carrying multiple mortgages on your home, now is a great time to crunch the numbers and consider pursuing a lower interest rate, and consolidating some debt.