One option to consider when refinancing your mortgage is to refinance for more than the remaining balance of your original mortgage; this is tapping into your home equity, or cashing out equity, so to speak. With low interest rates, you can do so without increasing your monthly mortgage payment. For example, at 6.4 percent, the monthly installment on a $250,000, 30 Year fixed interest rate loan is $1,546.75; however at 5.4 percent, that same mortgage payment lets you take out nearly $20,000 in equity more.
The way to put this cash to use is paying off higher rate loans you may have, like credit cards. Suppose you have a $15,000 car loan at 10 percent interest, also paying the minimum payments on $10,000 worth of credit card debt at 17 percent interest. Your payments every month for that debt would be over $680. Suppose then that you refinance your mortgage loan, taking out $25,000 in equity to pay your car and credit card debt. This would result in a savings of $505 per month!
You don’t have to use all of the cash for paying off bills. It is of course, your money. When Tina Davis refinanced her adjustable rate mortgage (ARM) for a fixed interest rate loan last summer, she increased her mortgage load $37,000, from $103,000 to $140,000. She used the proceeds to pay her refinancing expenses and $17,000 of the equity to pay off an 8% home equity loan, for which she had been paying $250 every month. She spent the remaining $14,000 to install hardwood floors and re-stucco her home; all for just another $19 a month on top of her monthly mortgage payment.
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My name is Rob Regehr and I’m a personal finance writer with a chip on my shoulder for banks and brokers that take advantage of my friends and neighbors.
