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Topic: Cash
& Debt Management, Consumer
Issues
Q: How do I estimate savings by consolidating all our loan into
one? I would like to refinance the mortgage and also roll in car loan and
a home equity loan. Current mortgage has 10 more years, car loan at 4
years, home equity at 4 years. How should I evaluate the savings, since I
would essentially be stretching out the home equity and the car loan?
A: First,
Ask Our Experts (AOE) would not encourage you to stretch your
existing car payments over the term of a new mortgage and has mixed
feelings about stretching out the home equity loan. Without knowing your
precise objectives for rolling these into a new home mortgage, AOE is not
inclined to advise you against it, only to caution you that doing so would
likely increase your overall interest cost on these obligations even
though the new mortgage rate may be quite a bit lower than the current
interest rate on these loans. Unless your goal is to bring your monthly
payments to an absolute minimum, we would encourage you to structure a
plan of extra mortgage payments that would serve to pay off these other
debts by the same date they would be paid off if you didn't refinance.
Let us illustrate using some hypothetical numbers. You can substitute
your own to arrive at the right monthly payment amount in your case.
First
let's make some assumptions about your current debt
Current mortgage: Balance $100,000, Rate 7.5%, Payment $1,187.02, matures
in 10 years
Current HE loan: Balance $15,000, Rate 8.5%, Payment $ 369.72,
matures in 4 years
Current auto loan: Balance $12,000, Rate 9.9%, Payment $ 303.78,
matures in 4 years
Total: Balance $127,000, Payments $ 1,860.52
Now let's assume you roll all these debts into a new $127,000 first
mortgage at 5.5% for 15 years.
Your minimum monthly mortgage payment will be $1,037.70, providing you
with the opportunity to reduce your monthly debt service payments by a
whopping $822.82. But doing so would result in your taking 15 years to
pay off a car that will probably be in the junkyard much sooner.
So, using an online mortgage calculator, calculate what payment it would
take to pay off these shorter-term obligations in the same time. We used
the calculator at Interest.com (http://www.interest.com/cgi-bin/financial_new.cgi),
but there are many available and they all do pretty much the same job.
Going through this quick exercise yields the following payment amounts for
the components of the new loan amount:
To repay the current first mortgage amount in 10 years, payment needs to
be $1,085.26
To repay the current HE loan in 4 years, payment needs to be $348.85
To repay the current auto loan in 4 years, payment needs to be $279.08
To get all debts paid off by current maturity dates, initial monthly
payment should be $1,713.19. In other words, you would need to make
additional monthly payments of about $675 ($1713.19 - $1037.70 = $675.49).
While your monthly payments are reduced by only $147.33 initially, that
entire savings is interest savings. After four years, you could reduce
your monthly payments by $628 since the car loan and home equity loan
will have been "paid off".
There is an income tax element to this problem that we have ignored here
because it's pretty insignificant. The tax benefit you realize currently
on your first mortgage and home equity loan interest payments will be
reduced because the interest cost is reduced. But this will likely be
offset (at least for the first four years) by converting the interest on
the auto loan to deductible mortgage interest.
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Disclaimer
"Ask Our Experts" is intended as a medium to reply to
frequently asked financial questions and to provide answers which are
appropriate for most consumers. We make every effort to ensure that
responses are technically accurate, but we cannot guarantee such accuracy.
We attempt to provide responses that are appropriate to the circumstances
of the person submitting the question, but we cannot guarantee our response will
be appropriate because the Q&A format precludes responders from gaining
personal insight into the submitter's circumstances and other factors that
influence advice rendered in a financial planning relationship. Similarly,
you should not assume that a response to a given question will be appropriate in
your situation, because your individual circumstances may differ from those of
the person who submitted the question. You are always urged to seek the
advice of a qualified professional who is aware of the details of your personal
situation prior to making any important financial decisions.
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