The mortgage market has changed a lot in the past decade or so. In the past, virtually anybody could get a mortgage—even one for much more than they could afford. At that time, interest rates were higher, but lending standards were easier. Today it’s harder to qualify, and interest rates are just starting to move up from historic lows.
Maybe you took out a second mortgage (more commonly called a home-equity loan) back when rates were high. That’s just one reason you might consider consolidating your loans. But should you? Does it make sense? Or is it best to keep the loans separate?
Four Reasons to Consolidate Your Mortgages
Casey Fleming, a mortgage advisor and freelance writer who is the author of “The Loan Guide: How to Get the Best Possible Mortgage,” cites the following four reasons for consolidating:
1. Reduce Your Interest Rate
About 15 years ago, average mortgage rates were much higher. In mid-June 2007, for instance, the average 30-year rate hit a high of 6.74%. But in July 2021, rates averaged 2.87%—less than half the rate in 2007. A lower rate could mean saving thousands of dollars on your loan. The lower the interest rate, the less you will pay in total over the whole term of the loan. Using a mortgage calculator is a good resource to budget these costs.
- If you are carrying two mortgages, consolidating them into one for a reduced interest rate or a shorter loan term can save you a significant amount of money.
- Refinancing from a variable-rate mortgage into a fixed-rate loan can help reduce concerns about whether you can afford your mortgage payments later in the loan.
- Consolidating to lower your payments usually winds up costing you more over time, as your loan resets to a longer term.
2. Eliminate the Risk of a Variable-Rate Mortgage
Because payments are often lower at the beginning of a variable-rate mortgage, home buyers may be lulled into purchasing a home they can’t later afford. As the introductory period ends, customers may find the payment may move too high for their household in the fairly near future. Consolidating your mortgages into a single fixed-rate mortgage will eliminate the concern of a significantly higher payment later in the mortgage.
It’s a particularly good move when rates are relatively low. Maybe last year would have been better, but now is still good. The Federal Reserve Board has raised mortgage interest rates nine times since 2015, but it last raised rates in Dec. 2018 and has indicated that no raises are planned for 2019.
Simply comparing monthly mortgage payments is likely to lead you into making a bad deal on refinancing; you need to look at all the costs over time.
3. Pay Off Your Loans Faster
Along with combining both loans into a single payment, consider a shorter loan. The total amount of interest you will pay is lower, and the property or properties are yours sooner. Of course, the monthly payments will be higher.
Consider the example of a 30-year fixed-rate mortgage on a $250,000 home that would cost about $1,150 per month. If you make that into a 15-year loan, the monthly cost skyrockets to $1,811—a higher payment but less costly over time, because in 15 years you will make fewer payments than in 30 years and pay roughly $88,000 less in interest.
4. Lower Your Payments
The only time this makes sense is when you find yourself in over your head. The problem is that over time decreasing the payment amount is usually going to cost you more. According to Fleming, “Lower monthly payments rarely mean lower lifetime costs—or even lower annual interest costs—because the new loan almost always resets your payment schedule to a longer term, and less of your payment will go to principal.”
Because interest is front-loaded into most mortgages, a smaller amount of your payment goes toward principal in the early years of a new mortgage. If you keep resetting the loan, you end up paying more in interest in the long run. This is why serial refinancers find it more difficult to pay off their mortgage(s).
The Bottom Line
If you consolidate your mortgages, make sure it’s a benefit to you in the long run. Look at the total amount you will have to pay on the loan and the pace at which you will build up equity. Simply comparing payments is short-term thinking. According to Fleming, “No tool is used more often to talk homeowners into bad deals than the monthly-payment comparison. It is over-simplistic and costs homeowners millions of dollars every year. In an ideal world, the term of the new loan should be the same as—or shorter than—the existing loans.”