Combining first mortgage with home equity loan


We have our first mortage (original 30 yr fixed) almost paid off. We owe $35,000 and send $1,000 a month. We cut the loan down to 15 yrs. We also have a home equity loan (fixed) which has $40,000 at 7 1/4% fixed. We have about 4 yrs left on this loan.

We need to do home repairs to prepare to sell the house. The repairs will cost approx $50-60,000 (guessing). My husband is in his 70's and still works. He retired from his full-time job after 30 yrs and started his own business. Our income has been cut in half. We need to sell the house we've lived in for almost 40 yrs.

Would it be better to take out a new First Mortgage and pay off the other two and have one payment? We don't want to use his savings to pay for the repairs...or should we and just keep paying the mortgages. We were thinking it might be better to combine all the money into one First mortgage.

Any thoughts would be appreciated.


Comments (5)
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Your situation is special because it sounds as if you're going to be paying off whatever loan(s) you have soon, when you sell the house. So, looking at your overall costs, the fees and expenses associated with a loan may be more significant in the overall cost of the money than the interest rate. So, whatever option you choose, be very careful to inquire about fees. Your payment will be lower if you combine all your debt into a new first mortgage, and your interest rate on a new first mortgage will also be lower than on a second.

The issue of taking out savings versus borrowing to do these repairs is somewhat personal and somewhat hard numbers. Obviously if you're getting a better return on your investments than you'll pay in interest on borrowed money, leave your savings alone and borrow. Most people are in more of a gray area, with investments that pay about the same, or a little less, than they'll pay out for borrowed money. In this case I would still lean toward suggesting that you borrow rather than deplete savings. There is a lot of freedom and flexibility to having cash available when/if you really need it.

One other question I would ask is, are you sure you need to spend this kind of money to ready your home for sale? If you have not done so, I'd suggest checking with a realtor. Sometimes you spend money to renovate, and then the buyer wants something different and rips it all out to do something else. It might make more sense to discount the price of the home and let the buyer make his/her own upgrades. That would save you a lot of hassle and possibly result in netting more money in your pocket on the home.

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Another consideration; you will probably encounter a problem taking out a new mortgage if your husband is newly self-employed. Most lenders want to see that someone has been self-employed for 2 years.

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Two proposed best options;

A) Contact your current equity (2nd) lender, and ask them if they would refinance their existing 2nd into a HELOC (open ended line of credit) for a total of $100,000. That will give you enough to pay off the existing $40,000, and leave another $60,000 "in the purse" that can be drawn from just an as-needed basis... and only incur interest charges on that basis as well.

B) Take a complete new refinance as a 1st lien HELOC (rates are adjustable... which is in your favor for at least another 2-3 years at this point, as the interest rate markets are on a longterm decline presently... so sez my opinion, anyway.)

With your moniker I am assuming you are in New York... the only state that sticks its residents with a mortgage tax of 1%... so be aware of that speedbump along the way as well. Its inescapable in either of the above solutions.

Dave Donhoff
Strategic Equity & Leverage Planner

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I have thought about various improvements on my home for a future sale... but as soon as I make those improvements, I will have to charge more for my home to make-up for those improvement costs.

I am of the opinion that their are more people who can afford cheaper homes. Therefore, I am going keep my home at it's current "stale" state. Unlike other homes that may feature nice kitchens and bathrooms, my home will "feature" a lower price!

So, how necessary are your $60,000 improvements?

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Yes, I put a little more thought into this after I responded yesterday, and I was thinking that $60,000 is a very large amount of money to spend to ready a house for sale. I can see $10,000. You want to fix things that are going to cause problems in inspections, kind of spruce the place up so it shows well. But I guess it all depends on the area the house is in and its current value compared to probable value after renovation.

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