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Refinance Considerations
Get Some Cash
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Refinance Considerations
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Another way to make a refinance work for you is to refinance for
more than the balance remaining on your old mortgage -- in effect,
tapping your home equity, or "cashing out," in mortgage speak. Thanks
to favorable rates, you may be able to do so without boosting your
monthly outlay. For example, at 8.5%, the payment on a $200,000,
30-year fixed-rate mortgage is $1,538. But at 7.5%, that same payment
lets you borrow nearly $20,000 more.
The best use for the extra cash is to pay off any higher-rate loans
you may have. Let's say that you are carrying a $15,000 car loan
at 10% and making minimum payments on a $10,000 credit-card balance
at 17%. Your monthly payments on those debts would total $680. Then
assume you refinanced your mortgage, taking out an additional $25,000
to pay off your car and credit-card loans. Result: At 7.5%, your
additional monthly mortgage payment would total only $175, so you
would come out $505 ahead ($680Ð$175=$505).
Of course, all the extra cash needn't go for paying off debts.
When the Menards swapped their ARM for a fixed-rate last December,
they also increased their mortgage load by $34,000, from $106,000
to $140,000. They used $3,000 of the proceeds to pay their refinancing
costs and another $17,000 to pay off a 10% home-equity loan, which
had been costing them $250 a month. Then they spent the remaining
$14,000 to build a garage for Roger's antique-car collection --
and they did all this for just another $19 a month.
One warning: When you decide to increase the size of your mortgage
significantly, remember that if you default on that loan you can
lose your home. So be sure you don't spend the money frivolously
or increase your overall debt load by running up your credit-card
balances again.
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