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).
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.