Navigating the world of home loan finance can be overwhelming for even the most credit- and real estate-savvy consumers. Myriad options and programs are available to consumers, so it is important to determine, first, you and your family's financial priorities and goals. If you have a first mortgage and a home equity line of credit, there are several methods by which you can eliminate the smaller loan. It is important, however, to consider the advantages and disadvantages of each method.
It is possible to pay off a home equity loan using the cash from a first mortgage refinance. The question, however, is whether you should do this. Refinancing your first mortgage to pay off an equity loan will increase the size of your first mortgage and your first mortgage payment. It will also affect the loan-to-value ratio on your home, which in turn can affect the first mortgage rates you will be offered. For example, if you have a home worth $400,000, a first mortgage of $350,000 and a home equity loan of $25,000, your LTV on a first mortgage refinance of both these loans will be 94 percent.
It is critically important to know how your lender plans to adjust your rate and mortgage payment as you increase the size of your mortgage refinance. Mortgage lenders often have matrixes that establish categories of rates based on loan-to-value. The most competitive mortgage rates are offered when your loan-to-value is below 80 percent. If you have a loan-to-value over 95 percent, you may not qualify for a market mortgage rate, and this may affect your ability to take out cash in the refinance as well.
If you decide to use refinance proceeds to pay off an existing equity loan, you need to make sure that your long-term financial goals will be met with that refinance. While it may be possible to save money in the short term by refinancing, you may be actually paying more in the long term if you agree to a higher first mortgage interest rate.
Paying off an existing equity loan with cash from a refinance is straightforward, but because your house is at stake -- after all, it serves as collateral -- you must ensure that you follow the correct procedure. Once you receive your funds and you send the appropriate amount to your equity loan lender, request a release of lien. This document guarantees that this lender no longer holds a position on your home.
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