November 22, 2004, Revised July 18, 2007, September 4, 2007, February 25, 2011 Before the financial crisis, it was possible for some home buyers to consolidate short-term debt into their purchase mortgage, usually to reduce their payments, often making themselves poorer in the process.After 2007, higher down payment requirements made it very difficult.
However, the increase in loan size from $270,000 to $285,000 increases either the mortgage insurance premium or the interest rate on the purchase mortgage.
It takes only a ¼% rate increase on $285,000 to offset the savings from a 6% rate reduction (including the shift to deductibility) on $15,000 of credit card debt.
The $15,000 second mortgage is also no-cost at 10% for 15 years.
She is in the 25% tax bracket and wants interest loss to be calculated at 2%.
While consolidation in the first mortgage eliminates the high payments on the non-mortgage debt and increases tax savings, these are more than offset by higher mortgage insurance premiums and smaller debt reduction.
Consolidation with the 10% second mortgage, on the other hand, turns out to be slightly profitable.
The consolidation increases the loan from ,000 to ,000, and the ratio of loan to value from 90% to 95%.
If a 95% loan-to-value ratio remains within the lenders underwriting requirements, the consolidation will work, but if 90% is the maximum allowable ratio, it won't.
The calculator measures cost as total monthly payments over the 6-year period; plus the lost interest on those payments (interest that could have been earned but wasn’t); minus the tax savings on interest, including the interest earnings on tax savings; minus the reduction in debt balances over the 6 years.