My son has a $115,000 mortgage at 5.8 percent. He also has a home equity line of credit of $40,000 at 9 percent. Currently, he can get a 30-year loan at 3.5 percent, or a 15-year note at 2.75 percent. His take-home pay is between $70,000 and $80,000 a year, and these are his only debts. Should he combine the mortgages into one loan?
First, I only recommend mortgages of 15 years or less. Now we’re looking at a 2.75 percent loan versus a 5.8 percent loan versus a 9 percent loan. I advise people to put home equity loans under Baby Step 2 of my plan, which is pay off all debt except for the house, provided that the loan is less than half of your annual income. Based on the income figures you gave, this situation is kind of on the bubble.
If I were in your son’s shoes, I’d probably combine the two loans and refinance. I’d go for a new $155,000 fixed-rate mortgage at 2.75 percent, with no balloons and no calls. This kid can live a good life and get the mortgage paid off pretty quickly with the kind of money he’s making.
But if it’s me, I’m getting as short a term as possible on a refinance—maybe even a 10-year note instead of 15 years. Just imagine him getting all this knocked out and still having the majority of his life ahead of him. That’s financial peace!
* Dave Ramsey is America’s trusted voice on money and business. He’s authored four New York Times best-selling books: Financial Peace, More Than Enough, The Total Money Makeover and EntreLeadership. The Dave Ramsey Show is heard by more than 6 million listeners each week on more than 500 radio stations. Follow Dave on Twitter at @DaveRamsey and on the web at daveramsey.com.