Published March 06, 2013
Dear Dr. Don,
I need some help as I try to consolidate my debt while in the process of getting a divorce where I take possession of the house. I owe $120,000 on my home with an interest rate of 4.5% on a 15-year mortgage. I also have a $57,000 home equity line of credit, or HELOC, at 3.4% and a car loan requiring payments of $360 a month for four more years. I want to refinance my home loan and am not sure if I should roll all of this into one lump sum over 15 years at a rate of 2.99% or over 30 years at 3.6%. Another option would be to refinance the mortgage payment alone. I would like to retire at age 65 in seven years. I have a 401(k), an annuity and $200,000 in savings. What advice can you give me?
So you're getting the house? That's not always a good thing. If you have enough equity in your home to refinance without paying private mortgage insurance, or PMI, have a good credit history and income to qualify, why not combine the first mortgage loan with the HELOC?
Bankrate's national average for a 15-year fixed-rate mortgage is 2.96%. That's pretty close to the 2.99% rate you quoted. Presuming you can get an interest rate close to that, it would cut your first mortgage interest rate by about a third. It wouldn't be a big savings over the current interest rate on your HELOC, but it is still some savings. Another benefit is that you'd be locking in at that rate as opposed to facing an adjustable rate on the HELOC going up and becoming more of a costly burden over time.
If you don't have enough equity to combine the two loans, you could still refinance the first mortgage. The challenge then becomes getting the HELOC lender to agree to a refinance.
Since you are less than a decade away from retirement, I don't recommend refinancing with a 30-year fixed-rate mortgage if you can afford the payments on the 15-year mortgage. You're making the payments now, so that shouldn't be a big challenge for you.
Your retirement age for full Social Security benefits is 66 and 2 months. If you really enjoy your work, I'd suggest remaining employed until that time instead of retiring at age 65.
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