Combine Home Mortgage Rates
100% mortgage loans have changed the dynamic of home refinancing, because so many borrowers today are trying to refinance their 1st and 2nd mortgages that they took out when they purchased their house with 80-20 home loans a few years back.
Peace of Mind with Fixed Rate Mortgages
According to Paul Proffitt a loan officer with Community First Bank, "The lending guidelines from a few years ago were so much easier. Stated income loans were very common and someone with below average credit scores could like qualify for a 100% home purchase loan with no money down."
Clearly this was a recipe for disaster as borrower had very little personally invested in this real estate transaction. Many homeowners find themselves strapped with an underwater mortgage.
Today as the mortgage lenders who are still in business are focused on more conservative home mortgages with less risk. Refinancing has become responsible and fixed rate home loans are more recommended than adjustable rate time bombs.
Can You Combine the Interest Rates with First and Second Mortgage Loans?
In recent years, many cash-strapped buyers opted for combo 80-20 piggyback loans, which entail a first which covers 80% of the property's value and a second to cover the 20% balance. Because interest on a loan mortgage loan is tax-deductible, and mortgage insurance is not, the after-tax cost of piggybacks is usually less than loans with private mortgage insurance (PMI).
The adverse part of a combo loan is that it usually involves more risky loan types. While the first loan for 80% is typically a fixed-rate loan, there are a variety of 2nd mortgage types used for the remaining 20% balance, including variable rate home equity loans (HELOCs). The problem with this is that at the first adjustment, the rate can rise as much as 6%. The good news is that fixed interest rates are still very attractive, and home values have increase enough for borrowers to take advantage of new-found equity to get a 1st and second mortgage combination loan to refinance both loans together.
One in four adjustable rate mortgages (ARMs) will be adjusting by 2007. Combo refinancing makes good sense if you have at least 20% equity built up into your home. But, if you combine 1st and second mortgages together with less than 20% equity, your new loan will generally end up carrying costly PMI, and you could end up paying more over the long run. In this case, second mortgage refinancing would be a better strategy. In her article, "Refinance or Second Mortgage? Combining 1st & 2nd Mortgages Together", Lynda Nelms, experienced loan officer and author of popular column "Ask Lynda", outlines a situation where a second mortgage refinance was actually a better solution for one of her clients.
As Lynda points out in her article, depending on the home equity program, 2nd mortgages may cost you a few thousand dollars in closing costs. She also states that most 2nd mortgages with no points and no fees require credit scores of over 700 and the combined loan to value (CLTV) will most likely need to be under 90%. But an increase in interest rates can help eliminate fees, which means that if you pay a slightly higher rate, you may be able to avoid paying some of the fees.
Many experts agree that refinancing an 80-20 combo loan to a less risky loan type within 2-3 years is a good idea, so you can avoid the next rate hike. Whether you should combine the first and second into a single mortgage or simply refinance the 2nd depends on how much equity you've built in your house since you bought it.