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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 ($680-$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. |
