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 talk.
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.
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