An existing mortgage shouldn’t prevent you from getting a new one if the situation calls for it. In many cases, a second mortgage can be a real shot in the arm to your finances. However, if you don’t want the hassle of two loans, you can roll your existing mortgage into your new one. The catch is that you must qualify for a loan at the combined amount.
Consolidation vs. Second Mortgage
Adding the balance of your existing mortgage to a new loan works best when the payments for two loans are unmanageable. Say your first mortgage is $150,000 at 4 percent for 10 years. Your monthly payment will be $1,519. Now, say you need an additional $100,000. You choose a 20-year term at 3.5 percent. This gives you a payment of $580 per month. The two payments combined will total $2,099 every month. If you consolidate the loans with a 20-year term and a 3.5 percent rate, however, your total monthly payment will be $1,450. Not only will you pay $649 less monthly than you would with two mortgages, but you will also actually pay $69 less than you were paying on your original mortgage. The downside is that you will extend the repayment time on the initial loan, but if you really need the funds, it’ll be worth it in the long run.
Finding the Right Loan
When looking to consolidate mortgages, start with the lender that holds your current loan. Contact your loan officer and grill him about rates, terms and fees. Be especially cautious of a prepayment penalty. This is a percentage of your balance charged by the lender for paying off early. If your prepayment penalty is 2 percent and you owe $150,000, the lender will charge you $3,000 to pay off early. Your existing lender will almost certainly waive this fee if you refinance through it. However, if you really feel that another lender’s terms are better in the long run, the extra fee won’t matter as much. If you don’t have a prepayment penalty, you can shop the loan to other lenders without losing sleep.
Applying for a consolidation loan is similar to applying for an initial mortgage. Fill out an application at your chosen lender, indicating the total amount you wish to borrow, including the existing loan with the new request. Sign any disclosures provided, including authorization to run your credit report. Provide two years of tax returns and Forms W-2 along with one month of pay stubs and two to three months of bank statements. The lender uses the information from the application along with the supporting documentation to determine if you qualify.
Meeting the Criteria
To qualify for a new loan, you must meet the lender’s debt-to-income and loan-to-value ratios. Your lender will tally your monthly payments as shown on your credit report and add the total to the proposed payment for the new loan. Next, it will determine your monthly income from your W-2s, pay stubs and tax returns. Your existing debt plus the monthly payment for the consolidated loan should not account for more than 40 percent of your monthly income. This means that if your total monthly debt is $2,000, you must show at least $5,000 in monthly income. Loan-to-value is the ratio of your loan balance to the value of the collateral property. Most lenders allow for an 80 percent loan-to-value ratio. This means if you combine a $150,000 existing mortgage with a new $100,000 loan, your house must be worth at least $312,500. If you meet these criteria, you will have little problem adding your existing mortgage to a new loan.