Having two mortgages isn’t as rare as you might think. People who amass enough equity in their homes often take out a second mortgage. They might use the money to pay off a debt, send a child to college, finance a business,or make a large purchase. Others use a second mortgage to enhance the value of their property through remodeling or an addition like a swimming pool.
The upside in a second mortgage is the relatively low-interest rate. But managing two mortgages can be trickier than handling just one.
Luckily, there are ways that you can consolidate two mortgages into one. But the process can be tricky, and the math may not make it worthwhile in the end.
Key Takeaways
- Consolidating loans may require the help of an expert broker with experience in the process.
- Consolidation can simplify your finances and may lower your monthly payments.
- You should, however, do the math and make sure it saves you money over the life of the loan after all of the costs are added in.
Combining Mortgages
Let’s look at one example: You took out a home equity line of credit ten or more years ago. That's essentially a second mortgage since your home serves as collateral for the loan.
During the 10-year draw period—the time when you could “draw” on your credit line—you were paying a manageable amount: $275 per month on a $100,000 line of credit.
According to the terms of the loan, after ten years the draw period becomes the repayment period. Over the next 15 years, you have to pay down the loan like a mortgage.
Now the $275 payment has become a $700 payment and if it's a variable-rate loan, it could move higher if the prime rate increases.
By consolidating this loan and your mortgage loan, you could save more than $100 a month and lock in your interest rate rather than risk seeing it escalate if the prime rate goes up.
On the other hand, maybe you want to pay the loans off faster and want better terms that will help you do it.
How does this type of consolidation work, and is it a good idea?
Know What You're Starting With
When you withdraw money using a second mortgage, you are reducing the percentage of your home that you rather your lenders actually own. The loss may be offset or even erased if you're spending the money to expand or improve the home or if its value has increased due to market conditions.
Nevertheless, you could be pulling cash out of your home. That's called a cash-out loan and it can add to the interest rate charged for the new loan and reduce the amount you qualify to borrow.
Cash-out loans are priced higher, lenders say, because the borrower is statistically more likely to walk away from the loan if they get in financial trouble.
You can go for a rate/term refinance, or refi. This type of loan is simply an adjustment of the interest rate and the other terms of your current loan. The loan is considered safer to the lender because the borrowers aren't pocketing any money or reducing the amount of equity they have in the property.
Cash-Out or Refi: What's the Difference?
The distinctions matter. According to Casey Fleming, author of "The Loan Guide: How to Get the Best Possible Mortgage", the terms and the amount you pay on new mortgages could be very different.
For example, say you and a friend are both getting 75% loan-to-value refinance loans under the conforming loan limit, which is $766,550 in 2024. Yours is a cash-out loan, but your friend's is not. Assuming you are equally creditworthy, your loan could still cost about 0.625 points more.
One point is 1% of the loan amount. So, if your loan amount is $200,000, you would pay $1,250 ($200,000 x .00625) more for the same loan that your friend got.
Why Cash-Out Loans Cost More
Think of it this way. If you acquired the two loans when you bought the house, it is not a cash-out loan since the second mortgage was used to acquire the home, not pull cash out of it. But, if you opened the second loan after you bought the house, that was a cash-out loan. A new consolidated loan will be a cash-out loan, too.
There’s another reason the distinction is important. Because cash-out loans are riskier to the lender, they may only lend 75% to 80% of your equity in your home versus 90% on a rate/term refi.
If you are seeking a cash-out loan, the bank will demand that you have substantially more equity in the property than you would otherwise need.
How to Consolidate Loans
The lender will do all of the complicated paperwork that goes with consolidating the loans. Your job is to be an informed consumer. Don’t talk to one—talk to several.
Since consolidating two loans is more complicated than a straightforward home mortgage, it’s best to speak personally with as many as three or four lenders. You could talk to your bank or credit union, a mortgage broker, or take recommendations from industry professionals you trust.
Of course, ask them if the new loan will become a cash-out loan or a rate/term refi. Is it a fixed or variable-rate loan? Is it for 15 or 30 years?
Getting Through the Approval Process
Once you’re happy with a lender, you'll be walked through the process. Don’t sign anything without reading it first, and make sure you understand the payment schedule.
Keep in mind that a cash-out loan can be converted to a rate/term refi as little as a year later. If you do, you're no longer consolidating loans. You're refinancing a single loan.
Of course, you'll only want to consider doing this if mortgage rates are stable or lower at the time you're refinancing.
When Is It a Good Time to Consolidate Mortgages?
If you think you can get a better interest rate on either your first mortgage or your second mortgage, it's worth looking into a consolidation mortgage.
The most likely candidate to benefit from consolidation is a person with a sterling payment history and a significant amount of equity in the home. That candidate will qualify for the best available interest rate.
If you're that candidate, do the math and make sure that you're saving money over the life of the loan after all of the costs associated with obtaining the consolidation loan.
That, aside from the sheer convenience of a single payment, is the benefit of a consolidation loan.
Can I Consolidate Mortgages and Still Qualify for a HELOC?
If you have equity in your home, you can borrow against it. Just remember that you could be mortgaging your house into a very distant future and, over time, paying much more for it.
A home equity line of credit, or HELOC, is essentially a second mortgage. The lender is making money available at a favorable interest rate because the homeowners are using the equity they have in the home as collateral.
Piggyback Mortgage vs. Consolidated Mortgage: What's the Difference?
A piggyback mortgage is a second mortgage that is taken out at the same time as the first mortgage in order to finance the purchase with a lower down payment. Often, the borrower gets 80% financing from the first mortgage and 10% from the second mortgage and puts down 10% in cash.
If that borrower later applies for a consolidated mortgage, the piggyback mortgage will not be considered a "cash-out" mortgage. The loan has been used to finance the original purchase of the home, not to provide a source of cash for any other purpose.
However, the piggyback mortgage probably comes at a relatively high interest rate.
According to the Consumer Financial Protection Bureau, the piggyback mortgage was common in the early to mid-2000s when home prices were soaring but is relatively rare today.
The Bottom Line
Many homeowners refinance or consolidate mortgage loans in order to score a lower monthly payment.
That's not necessarily as smart as it sounds. You could be stretching out your mortgage indebtedness into the dim future, and denying yourself an opportunity to save more towards a comfortable retirement.
Before you refinance, calculate the real cost of your mortgage payments in total. Add in the costs of refinancing. Then compare that to the total you would be paying for your home if you did not refinance your mortgage.
