Q: I have a mortgage and a home equity loan on my house, and I'm thinking of refinancing. The value of the house is solid and so is our credit, so I'm confident we'll qualify. My only question is whether I should refinance the primary mortgage or home equity loan first, or whether I should do them together. Should one take priority over the other? What do you think?
A: You should look at refinancing both loans at the same time, but whether or not this makes sense depends on the characteristic of each loan. Here are three key elements of that decision:
- How do the mortgage rates compare? Current mortgage rates are very low, but whether or not they are low enough to justify refinancing depends on how they compare to your existing loan rates. Run separate calculations for each of your current loans to see how much you could save in each case by refinancing.
- What is the length of the loans? If your two loans have very different amounts of time remaining on them, consolidating them into one might have an undesirable affect on your payment schedule. Effectively shortening the length of a loan can make your monthly payments unmanageable, while lengthening it can cost you more in interest expense over the life of the loan. Look at the impact on your monthly payments and total interest before you change the length of either loan by refinancing.
- Are there prepayment penalties? Check for prepayment penalties on each of your existing loans, and make sure they do not offset the financial benefit of refinancing.
Consolidating the two loans into one should make your debt easier to manage, and would save you an extra set of closing costs compared to refinancing the loans separately. However, evaluating the financial benefits of refinancing should be a separate decision for each loan, based on the factors described above. You should then consolidate only if it makes sense for each loan individually.