When Refinancing is Worth It
A Home Buying Article Contributed by Robert Scalia
When Refinancing is Worth the Effort and When It is Not.
Refinancing can be a chore or your Saviour. You have the power to decide.
Consider the following scenario: For twelve years, John and Tamara owned a house and never bothered with refinancing. It never even crossed their minds.
They find out this summer that they qualify for a rate of 6.34 percent. But at the same time, they still owe $87,000 on their mortgage. The problem is that they want to take out $20,000 cash to pay for John's cranial surgery, which doesn't come cheap.
They could go about refinancing the $107,000 mortgage at a cost of $665.09 a month for 30 years. This would allow them to pocket the $20,000 they need, but they would end up paying $239,433.59 over the thirty year term.
But there are other options. They could go about refinancing the $87,000 mortgage at a cost of $540.78 a month. The instead of refinancing they could take out a $20,000 home equity loan at 7.23 percent for 20 years. That would run them a bill of $157.83 a month.
Add all those numbers together, ant the total cost over 30 years would be $233,239.20, a little lower than they would pay by refinancing. With the latter option, they might struggle with higher payments for 20 years. But they will save money over time.
So What to Consider When Refinancing Your Mortgage?
Whether you decide that you are going with a home equity loan or cash-out refinancing option, keep in mind that you'll have to pay private mortgage insurance if you borrow more than 80 percent of your equity.
In this case, taking out a hoe equity loan might actually be cheaper than refinancing.
But even before you do the math, you need to look at how you plan to spend the money from cash-out refinancing and whether this is a short-term purpose or a long-term endeavor.
If you're going to make payments for 15 or 30 years, you'll want to make sire you do it on something worth the effort.
Wen Refinancing, What Not to Spend Your Money On
When it comes to refinancing, spending the money on an addition to the house that will increase its value, potentially lifesaving experimental medical treatment or starting a business are all good moves.
Spending your refinancing cash on a vacation, your daughter's wedding, a car or a boat is probably not the best use for this money. Buying a luxury car or a yacht is not a good reason for refinancing your mortgage. Period.
Maybe you want the cash so you can clear a mountain of high-interest credit card debt. That may seem like a good idea at first, but you'd basically be taking 30 years to pay off credit card debt that you might have been able to tackle in a quarter of the time simply by trimming your expanses and being more fiscally responsible.
