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Mortgage Questions – Should I Do A Cash Out Refinance To Pay Off My Home Equity Line Of Credit HELOC?
October 17th, 2011 | 
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Should I Do A Cash Out Refinance To Pay Off My Home Equity Line Of Credit HELOC?
This is a very good mortgage question.
There are a lot of people who have home equity lines of credit HELOC as second mortgages and want to pay off their existing first mortgage along with the home equity line of credit HELOC.
A good idea, right? Consolidate the mortgages into one mortgage payment with a lower mortgage rate?
Does this make sense?
It depends.
First, if you plan on keeping your home for years to come and you’re currently not paying down on the home equity line of credit HELOC then perhaps it makes sense to pay it off.
Here are some mortgage questions you need to ask yourself:
How many years remain on the first mortgage you want to pay off?
Are you adding years to the new mortgage or are you going into a shorter term mortgage?
Is your new proposed monthly mortgage payment going to be higher or lower than the mortgage payment you’re currently making together with the home equity line of credit HELOC mortgage payment?
You want to look at mortgage costs and benefits.
If you’re lowering your mortgage payment and reducing your mortgage term (or not losing many years you’ve already put into the existing mortgage) and if you’re lowering your overall mortgage rate, then it would make sense to consolidate the first mortgage and home equity line of credit HELOC.
Here are the benefits: you’re reducing the mortgage rate on the first mortgage, lowering your monthly mortgage payment, eliminating the home equity line of credit HELOC that has a variable rate and will begin to rise and reduce the mortage term or keep the mortgage term roughly the same.
Here are the costs: whatever the closing costs are going to be based on the new mortgage refinance and closing a home equity line of credit HELOC that you could use to draw on in the future should you need cash.
The main mortgage question is: “Do the mortgage benefits outweigh the costs?” You decide.
Or send me an email with any additional mortgage questions.
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Mortgage Questions – Why Do A “No Closing Cost” Mortgage?
This mortgage question I get from time to time: “Why do a no closing cost mortgage?
Here’s the answer.
As you may know, to get a no closing cost mortgage, you’re taking a higher mortgage rate and it’s out of the revenue the mortgage lender or bank is getting from the transaction, they are paying your closing costs. Ok, that sounds good.
So, if you can drop your mortgage rate, drop your monthly mortgage payment and do it with no closing costs, it makes sense.
Your recovery period is 0 months. Awesome.
So let’s say you’re dropping your mortgage paymentment by $170 per month and it’s not costing you anything.
You’re “in the black” right away as you’re saving $170 per month.
Compare that to taking a lower mortgage rate and even lower mortgage payment.
Let’s say you’re dropping your mortgage paymenty by $250 per month. However, it’s costing you $5000 in mortgage closing costs to do it. Your recovery period would then be 20 months.
That means it’s going to take you 20 months to recover the $5000 in mortgage closing costs.
From a recoup closing costs standpoint, that’s not a lot of time. However, compared to saving $170 month right away with no costs, it may make more sense to take the slightly higher mortgage rate and payment.
To summarize, if you plan on keeping the home for the long term, then taking a lower mortgage rate and mortgage payment with paying mortgage closing costs would provide greater benefit.
If you plan on keeping the home for a short period of time and you can lower your mortgage rate and lower your mortgage payment with no mortgage closing costs, then the no closing cost mortgage would make sense.
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Mortgage Affordability – Can You Afford A 10 Year Fixed Mortgage?
This is a great question.
Looking at today’s mortgage rates, especially the mortgage rates for the shorter term mortgages – like the 10 year fixed and 15 year fixed mortgages – you say “Holy Cow! Those mortgage rates are really low!”
It’s true – the mortgage rates are very low right now.
However, from a mortgage affordability standpoint, can you afford to make the mortgage payment?
A 10 year fixed mortgage and 15 year fixed mortgage are great loans. The mortgage rates are low and the mortgage will be paid off in 10 or 15 years.
For those of you in your 40s and 50s, you can have your mortgage paid off by the time you retire. Pretty sweet.
However, look at the mortgage payments. The principal and interest payments for the 10 year fixed mortgages and 15 year fixed mortgages are going to be higher than the 30 year or 20 year fixed mortgages – even though the mortgage rate will be LOWER.
The question you want to ask is: “Can you afford a 10 year fixed or 15 year fixed mortgage payment for the next 10 or 15 years?”
You want to consider where your income is going to be in the future. If you are you self-employed will your income fluctuate to a point where it may become stressful to make the mortgage payment?
Are you close to retiring, going on a fixed income and your monthly cash flow may be dropping?
Mortgage affordability is a big question. Don’t be falsely attracted to the very low 10 year fixed mortgage and 15 year fixed mortgage rates.
Focus on being able to afford the mortgage payment.
If you can comfortably afford the mortgage payment for the 10 year fixed mortgage and 15 year fixed mortgage, then they are going to be the best and cheapest mortgage type.
If you’re unsure that you’ll be able to afford the 10 year fixed mortgage or 15 year fixed mortgage payment, consider a longer term mortgage, like a 20 year fixed mortgage or 30 year fixed mortgage.
You always have the option to prepay against these mortgages (as long as there is no prepayment penalty), which will effectively reduce the loan term, drop your net effective mortgage rate and save you thousands of dollars in mortgage interest you won’t have to pay.
Mortgage affordability – to see what will happen to your 30 year fixed mortgage by applying extra money to the mortgage principal, go to my biweekly mortgage calculator.
The mortgage calculator will show you how much you money you can save by prepaying the mortgage. Enter the amount you are comfortable adding to your mortgage payment to reduce the principal balance and you’ll see how many years you’ll take off your mortgage term!
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Biweekly Mortgage – How Does The Biweekly Mortgage System Work?
The Biweekly Mortgage – How does it work?
Well, to start, there is no such thing as a biweekly mortgage. All mortgages are amortized over a certain amount of time, where at the end of the mortgage term, the mortgage is satisfied.
So that means that you can’t secure a mortgage called a biweekly mortgage that debits your account every 2 weeks and applies that payment to your mortgage balance every 2 weeks.
There is, however, a biweekly mortgage payment system.
What the biweekly mortgage system does is take your monthly mortgage payment, multiply it by 12 and divide it by 26.
So if your mortgage payment is $1000 per month, the biweekly payment would be $461 every 2 weeks. $1000 x 12 = 12,000/26 = $461.
Then the biweekly mortgage payment installment is debited from your account and held in an escrow account until the second installment (or third monthly installment) is received.
There are 2 months out of the year when the monthly installment is debited 3 times. This just happens by virtue of the calendar.
At the end of the month, on a specified date, the installment is paid to the loan servicer. Be clear that the installment is not sent to the servicer until the second monthly installment is received.
The servicing companies (who are the companies or banks who you write your mortgage payment to) are not equipped to take half a payment every 2 weeks. If they receive a biweekly mortgage payment installment, they will return it to you as “insufficient.”
The biweekly payment system works automatically and regularly. There are 2 “triple debit” months in the year so that means that if the biweekly mortgage payment is $500, you will be debited $1500.
If the monthly mortgage payment is $1000, the $1000 is paid and the $500 balance goes directly to mortgage principal reduction.
By paying additional money towards your mortgage principal balance, your mortgage will be paid off sooner, your net effective mortgage interest rate will drop, you’ll save thousands of dollars in mortgage interest not paid, and you’ll save thousands of dollars on the back end of the mortgage by not having a mortgage payment to make!
Take a look at my BiWeekly Mortgage Calculator to calculate your savings.
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New Video! “2 Minutes Of Your Time For 7 Years Off Your Mortgage”
Watch this video:
In this video, David Bach, the author of “The Automatic Millionaire” shows how these homeowners will save thousands of dollars and take years off their mortgage term by setting up a BiWeekly Mortgage Payment Plan which will cut their mortgage payment in half and pay it automatically every 2 weeks instead of once a month.
Yale Roth has been in the mortgage industry for over 10 years and aims to help people save money by reducing their interest rates and paying down their mortgage.
Contact Yale at 561-350-7684 with any questions.
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