Get
Some Cash
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.
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.
