Homeowners have another opportunity to take advantage of a mortgage rate cut these days as various economic factors and the Federal Housing Finance Agency’s decision to eliminate refinance fees combine to pull back the mortgage market .
One strategy for taking advantage of these terms could be to refinance your mortgage and incorporate any home equity debt you have — such as a home equity loan or home equity line of credit (HELOC) — into the new loan. Here’s why it could save you money in the long run.
Why You Should Consider Consolidating Your Home Equity and Mortgage
Mortgage interest rates are generally lower than home equity products, and with mortgage rates expected to drop further in the near term, this is a great opportunity to reduce your higher interest rate debt.
For now, Federal Reserve policy is supposed to promote low interest rates, but most experts expect that to change as the COVID recovery continues.
“When the Fed starts 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 sensitive to market fluctuations, as these products tend to have adjustable rates, while prime mortgages generally have 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 to rise. “Wouldn’t you like to refinance your entire loan into a mortgage where your rate is secured?”
How does the end of refinancing fees affect this consolidation strategy?
“It’s huge,” Cohn said. “You have the gold ring on it. Not only have bond yields fallen, but so has the cost of borrowing because we got rid of those fees.
A refinance fee of 0.5% of the loan balance has been levied on most mortgage reviews 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.
Ending fees on August 1 will make it easier for borrowers to consolidate their debt, especially if it would have put them on the wrong side of that $125,000 threshold. The fees were paid for by lenders, and many of them opted to pass on only part of the cost to borrowers, so it’s unclear if anyone will see the half point savings when he refuses.
How to consolidate your debt
The easiest way to consolidate your mortgage and home equity debt is to cash refinance your primary mortgage and use the extra funds to pay off the balance you are carrying on your HELOC or mortgage. .
Check out Bankrate’s Mortgage Refinance Calculator to see how much you could save.
If you have enough equity in your home, you may be able to keep the line of credit open, even after you pay it off, according to Cohn.
“The benefit of a home equity loan is that it gives him access to the equity in your home at any time,” she said. “Maybe you don’t have to close it.”
For homeowners, a HELOC can be a great source of emergency cash should unexpected large expenses arise, as well as being a smart way to fund home improvement projects.
Keep in mind that if your lender asks you to close your HELOC, which many likely will do as part of a refinance, you will no longer have access to that equity unless you choose to open another line. credit later.
At the end of the line
Mortgage rates are coming back down, and while historic lows won’t last forever, the trend offers new opportunities for borrowers to take advantage of them.
If you haven’t refinanced yet or have multiple mortgages on your home, now is a great time to crunch the numbers and consider looking for a lower interest rate and consolidating some debt.