Q: I have a $23,000 second mortgage with a high interest rate—8.25%. Should I refinance both my mortgages into one to save money, and at what term? — Jim Davis, Weymouth, MA
A: One of the most important factors in deciding whether to refinance is how long you plan to stay in the home, says Shant Banosian, an executive at lender Guaranteed Rate. The longer you stay, the more you will benefit from any savings from a lower rate. You told us that you are hoping to sell your two-bedroom townhouse in about 18 months so you can move your family of four into a larger home.
You’d like to boost your home equity so you can walk away from your sale with enough money for a nice down payment. Given your time frame, Banosian says it would be a mistake to refinance into a shorter-term mortgage that would significantly raise the monthly payment. Instead, he says, open a home equity line of credit and use that to pay off the second mortgage. HELOC rates average 4.63%, according to Bankrate, and it costs very little to open one, Banosian says. “They’d cut their payment in half.” You could then apply those savings (about $130, you said) to your principal balance.