Is Combining Them Smart?

Daniel's son has a $115,000 mortgage at 5.8%. He also has a home equity line of credit of $40,000 at 9%. He can get a 30-year loan at 3.5% or a 15-year at 2.75%. Should his son combine these mortgages into one loan?

QUESTION: Daniel in Minnesota is calling because his son has a $115,000 mortgage at 5.8%. He also has a home equity line of credit of $40,000 at 9%. He can get a 30-year loan at 3.5% or a 15-year at 2.75%. His take-home pay is $70,000 or $80,000 a year. Should his son combine these mortgages into one loan?

ANSWER: I only recommend 15-year mortgages or less. We know we’ve got a 3% loan versus a 5.8% loan versus a 9% loan. We also say that you should put a home equity loan in Baby Step 2 if it’s less than half your annual income. If he’s making $80,000, then this is about half his annual income. It’s on the bubble, and I’d probably just refinance. I would probably get a new $155,000 mortgage on this house at 2.75% and lock it in at a fixed-rate with no balloons and no calls.

It doesn’t sound like he has much debt. You might consider taking out a 10-year mortgage instead of a 15-year and have a $1,600 payment if he is used to a $2,100 payment. He can still get out of debt making $80,000 and get that house paid off really fast. I want to put this mortgage as short as I can choke it up and do it. I want to get rid of it.