Breathing New Life into Your Home by Refinancing Your Mortgage

A Home Buying Article Contributed by Robert Scalia

One More Reason to Be Refinancing Your Mortgage?

When it comes to counting off reasons why people choose refinancing their mortgage, the idea that it can help raise money for much needed home improvements is among the most common.

But whether or not refinancing your mortgage is the best option available for this task isn't always a given. It will usually depend on the home owner's financial situation and goals, the interest rate of any new loan and the interest rate on the borrower's existing mortgage.

Well Then, How Does One Go about Determining If Refinancing Their Mortgage is a Viable Alternative?

One surefire way to make an informed decision is to examine the weighted average prime rate of both loan alternatives - the two alternatives being the mortgage refinancing versus a home equity loan. It may sound like a complicated task, but it's really a piece of cake when you get right down to it.

All you have to do is take the interest rate of each loan and then multiply that rate by its portion of the total debt.

An example might help make sense of this. Let's say a homeowner owes $100,000 on his existing mortgage . He has planned to spend roughly $50,000 on renovations for a new kitchen and a brand new garage and swimming pool.

Before refinancing his mortgage, the homeowner in question considers the alternative: taking out a $50,000 home equity loan or line of credit. If he did this, he would owe a total of $150,000. And in order to get the weighted average prime rate, he would have to multiply the rate of the $100,000 mortgage by two-thirds, while multiplying the $50,000 equity loan by one-third.

It's in the homeowner's best interest to pick the alternative with the lowest weighted APR, not to mention the one with the payments that will best fit his budget. To find out which is better, all he has to do is go online, find the relevant bank rate loan calculator and figure out his monthly payments. That should give him the best answer as to whether refinancing his mortgage is really the best option.

In case you're wondering, refinancing his mortgage turns out to be the better option in this case. But while this option will give him a lower monthly payment, he will pay out more in the end if he decodes to refinance his mortgage over thirty years.

Does This Mean Refinancing Your Mortgage is Your Best Alternative?

Is refinancing your mortgage the be all end all? Definitely not. A home equity line of credit allows a person to pay off the home repairs and borrow against the line again without having to take out another loan.

Because the interest on personal loans isn't tax deductible - while that on a mortgage or home equity loan typically is - using a revolving credit line can save you money. Financial discipline will be required.

The choice is yours.