Refinancing in Texas with a 2nd mortgage (home equity loan)

I have a friend who would like to save some money by refinancing her home.

She has a 1st mortgage with a balance of 120K @ 7.5%.

She has a 2nd mortgage (home equity loan) of 37K @ 7.74%

She’s currently paying 1305 a month for both.

She also has a 401K with a nice chunk of change in it, and she’ll be coming up on the age of 50 this year.

By combing the two mortgages into one, she can get an interest rate of 5.125%, save herself 350 bucks a month, and pay somewhere in the neighborhood of 3,500 in closing costs (I think this may be for a new 30yr, not sure).

In Texas, however, when combining these two mortgages its considered a home equity loan, all 157K, which means her interest rate is not as good as it could otherwise be, but she’s still saving a nice chunk of money per month.

The real problem is what happens if she wants to take out another loan using the equity in her home. If she needed 20K for whatever emergency a couple of years down the road, then the entire 157K plus the new 20K would be refinanced at whatever the going rate is for home equity loans, which could end up costing her a lot of money. I mentioned her 401k earlier, thinking maybe that could be used instead for a loan of emergency money, and as input for your consideration.

One lender told her if every penny of the home equity could be accounted for home improvement, then something could be done to prevent the rollup of the two into one home equity loan. Home improvements were made, but she doesn’t have every receipt.

What to do? She’s confused, and the lenders seem to be too, as half of them don’t seem to be aware of this Texas law about combining the two mortgages into one home equity loan.


Just a thought that might help. What is the value of the house? You didn’t mention that in your post. Could she borrow against her 401K temporarily to pay off the smaller 2nd mortgage? Or does she have cash value in a life insurance policy that she can use? Refinance the first mortgage at the lower interest rate with cash out to pay herself back to the 401 K. Or payoff the second, refinance the first at the lower rate, and write another second to pay herself back. All of it would depend on how much equity she has in her house and $401K plan. The difference in interest rate on the small second won’t change her payment much, it’s the first loan that you’re trying to get to.
Good Luck, Kathy