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Refinance Mortgage or HELOC?

Mark Cappel
UpdatedOct 20, 2010
Key Takeaways:
  • Take advantage of today's historically low refinance interest rates.
  • Start shopping for a home mortgage at the Bills savings center.
  • Complete a Form 1003 to start the home mortgage shopping process.

When shopping for a mortgage refinance, should I be concerned about my loan balance or my monthly payment?

We need money for an $80,000 addition and are trying to figure out if it would be smarter to refinance our existing 151,000 1st mortgage and/or HELOC which is at 27,000(40,000 limit) or take out a larger HELOC? What makes this decision difficult is that the 1st mortgage (adj) is at 3.125% and the HELOC (adj) is at 3%. The value of the home is $350,000. We have lived here for 21 years and have no plans to move. I like the ability to make extra principal payments and therefore reduce the balance. Should my main concern be about being able to make the payment or keeping my mortgage balance down? Also, we are in the 28% bracket.

Your question is challenging for several reasons. You do not mention your income or credit histories, or your debt-to-income (DTI) ratio. Also the rates you are paying are competitive in today's market, so I am guessing you refinanced both recently. Refinancing either loan will not result in a significant rate drop for you, which will cut your costs. For many homeowners today, the cost of refinancing a mortgage is so small in comparison to the drop in monthly payments that the payback is measured in months, not to mention the decrease in the lifetime loan cost.

Your loan-to-value (LTV) on both loans combined is 51%. Potential lenders will consider you a viable candidate for a refinance because your LTV is below 80%, assuming you have a steady income history, a strong credit score, and a DTI of approximately 38% or less. I discuss each of these in greater detail below.

You asked if your mortgage balance or your payment should be your main concern. Both are intertwined. As a mortgage balance increases, the monthly payment will increase, assuming you refinance to a loan with the same rate and term. Again, your existing rates are so competitive with today's rates I do not see you refinancing to a lower rate and a larger balance and keeping your monthly payment the same amount. Whether you refinance the mortgage or HELOC the result will be the same — your monthly mortgage or HELOC payment will increase.

Qualifying for a Refinance

Here are four things you need to be aware of when shopping for a mortgage or refinance.

1. Debt to Income Ratio

An important factor in qualifying for a mortgage or refinance is your debt-to-income ratio, which is called DTI in the trade. Your DTI is calculated by dividing your total income by certain debts you have, such as your principal and interest mortgage payment, property taxes, and homeowners insurance (PITI); any credit card or unsecured debt payments; student loan payments, and any vehicle payments. If the monthly payments for those debts take up more than 45% of your income, you will not qualify for a loan. See DTI: Debt-to-Income Ratio Information to learn more about calculating your debt-to-income ratio.

2. Two Years Work Experience

In general, lenders require that anyone on the loan has two been at the same job or working in the same industry for the past two years to have that income included in the qualifying income for a loan.

3. Loan to Value

Your loan-to-value (LTV) is another important component for qualifying for a loan. Your LTV is calculated by taking the current market value of your home (what you can sell it for in today’s market) and dividing it by the balance on your mortgage or mortgages. Do not use the value that the property tax assessor has assigned to your property, as it does not necessarily reflect the price you would get if you were to sell your home today. The higher the LTV, the harder it is to refinance. Some lenders will not refinance a loan if your LTV is above 90%, others even lower. There are some loans available through what is called Refi Plus that go up to 105% of your LTV, if your loan is serviced by Fannie Mae or Freddie Mac. You can find information here about the Refi Plus program.

4. Credit Score

Lenders use your credit score as an important factor in determining if you will qualify for a mortgage and if so, whether you will qualify for the lowest rates available. Everyone should keep track of his/her credit score, because it will have an effect on home loans, car loans, chances to get personal loans or credit cards, landlords for judging the suitability of a prospective tenant, and even can be used by employers in evaluating job-seekers. If you check your credit score now, you can see where it is now and work on building your score, if necessary, in case refinancing or purchasing another home is something you want to do in the future.

Next Steps

An appraisal is necessary for a mortgage or a refinance to determine the market value of the property. An appraisal usually costs $350. For an unofficial estimate of your property's value, go to

This is written in late 2010. The last three years have been brutal for housing values across the US. Some areas have seen market values fall 50%, where other areas have dipped 15%.

You mentioned the value of your property is $350,000. Is that the current value?

You will qualify for a home mortgage refinance loan if you have a steady, adequate income, your DTI is 35% or less, and the market values in your neighborhood have held steady. Download a Uniform Residential Loan Application (Form 1003), complete it, and start your home mortgage refinance shopping. Then, get a no-cost, pre-screened mortgage quote from one of's home mortgage refinance lending partners.

I hope this information helps you Find. Learn & Save.