Evaluating Combining Your Mortgage and
Your Home Equity Loan

If you are like many, you have used an increase in the value of your home and the equity you have built up as a source of borrowing through a home equity loan. Home equity loans have been attractive because they are relatively simple, flexible, usually only require payments of monthly interest and provide tax benefits.

However, most home equity loans have adjustable interest rates and your rate may have risen since you borrowed with your home equity loan. In fact, you may now find yourself in a position where the interest rate on your home equity loan is higher than the rate on your mortgage or even higher than the rates currently available on new mortgages.

Consider Consolidating Your Mortgage and Home Equity Loan
As with any review of your mortgage, you should consider rates, types of mortgages, monthly payments, costs of refinancing and how long you plan to stay in your home. With a home equity loan, you also need to remember that usually the required monthly payment is interest only and that the interest rate may change based on changes in overall interest rates.

Here is a calculator to help you compare your current monthly payments with those from a new mortgage that combines the balances of your existing mortgage and home equity loans.

Mortgage Comparison Calculator
Existing mortgage balance $ Home equity loan balance $
Fixed Rate Mortgage Alternatives
Interest rates (assumes amortization over the term of the loan) 30 year fixed
%		 20 year fixed
%		 15 year fixed
%
Adjustable Rate Mortgage Alternatives (Arms)
Interest rates (assumes 30 year amortization) 1 year ARM
%		 3 year ARM
%		 5 year ARM
%		 7 year ARM
%		 10 year ARM
%
Balloon Mortgage Alternatives
Interest rates (assumes 30 year amortization) 7 year balloon
%
 10 year balloon
%
Results
New Combined Mortgage Loan Amount
Monthly payment levels
Fixed rate mortgages
30 year fixed
20 year fixed
15 year fixed
Adjustable rate mortgages 1 year ARM
 3 year ARM
 5 year ARM
 7 year ARM
 10 year ARM
Balloon mortgages 7 year balloon

 10 year balloon

Interest is compounded monthly. This calculator is to be used for estimation purposes only. The financial institution is not responsible for its accuracy and the results are not guaranteed.

As you look at these results, there are be a few things that you will probably notice:

  • Even though the interest rates on shorter term fixed rate mortgages may be lower, the monthly payments are probably higher. This is because the amount of principal payment each month is larger. You are paying down the mortgage faster.
  • Usually, Arms with shorter term initial rate periods (for example, 1 and 3 years) usually have lower rates and lower monthly payments. This is due to the "yield curve" sloping upward with longer maturities. Longer term loans have higher rates.

Even though shorter term Arms and potentially balloon mortgages offer lower monthly payments, it is important that to understand that rates on Arms can increase after the initial period and that the entire balance of a balloon mortgage comes due at the end of the mortgage period. If you are considering an ARM or balloon mortgage, be sure that you would be able to afford a higher monthly mortgage payment if your rate increases. Here is a calculator that can help you evaluate the impact of increasing mortgage rates.

Analyzing the impact of a future increase in an
adjustable rate mortgage interest rate
Initial Mortgage
Loan amount $ Interest rate %
Amortization period Monthly payment $
Understand what can happen
If the interest rate is adjusted upward by:
1%
2%
3%
New interest rate
New monthly payment
Increase in monthly payment
Interest is compounded monthly. This calculator is to be used for estimation purposes only. The financial institution is not responsible for its accuracy and the results are not guaranteed.


Consider the Costs of Refinancing
As you analyze your refinancing options, be sure to factor in all of the costs that may be associated with the refinancing. You should recover those costs over a relatively short period with lower monthly mortgage payments. Here is a worksheet that will help.

How long will it take to recover your refinancing costs?
Your current monthly mortgage payment $
Your anticipated new monthly mortgage payment $
Costs you may incur when you refinance
Discount points $ Title search fee $
Origination points $ Title insurance fee $
Application fee $ Appraisal fee $
Credit check fee $ Inspections $
Your attorney fees $ Local fees and taxes $
Lender attorney fees $ Other fees $
Estimated costs of refinancing
Monthly savings from reduced mortgage payment reduction
Months to recover your refinancing costs
Interest is compounded monthly. This calculator is to be used for estimation purposes only. The financial institution is not responsible for its accuracy and the results are not guaranteed.

Other Issues to Consider

  • The size of your mortgage payment should only be one part of your mortgage decision making process.
  • If "paying off" your mortgage or significantly reducing your total debt level is important, a shorter term fixed rate mortgage with a 20 or 15 year term may be right for you.
  • If you plan to live in your home for only a short time (for example, five years or less), you may want to seriously consider an adjustable rate mortgage with an initial rate term that matches your moving plans.
  • Balloon mortgages are usually less attractive than a similar term ARM. With a balloon mortgage, you will need to secure a new mortgage at the end of the term subjecting you to not only to changes in rates, but also the costs and process of getting that new mortgage.
  • Be sure that you can afford your mortgage payments - both at the time you get it and in the event that you get an ARM and rates have risen when the initial rate period expires.

Summary
Choosing the mortgage that is right for you is critical. Consider what you want your mortgage to do for you. Factor in your plans for how long you anticipate needing the mortgage (how long you are going to live in the home) and be sure that you can accept the risk that your monthly payments may rise if you choose an adjustable rate or balloon mortgage.