Do you know how to squeeze dollars out of your home?

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In the last lesson, we discussed interest rate arbitrage as a means to save money. Other than credit cards, mortgage refinancing may be the ultimate way to use interest rates to save money. In today’s lesson, we will discuss how refinancing your home loan may result in huge savings.

Education:

In general, mortgage refinancing is a good move when you can save money by locking in a lower interest rate or payment, shorten your loan term, or restructure debt optimally.

Refinancing is the practice of paying off an existing loan with the proceeds from a new loan, usually of the same size size, and using the same property as collateral. In order to decide whether this is worthwhile, the savings in interest must be weighed against the fees associated with refinancing. The difficult part of this calculation is predicting how much the up-front money would be worth when the savings are received.

Other reasons to refinance include:

  • Reducing the term of a longer mortgage
  • Switching between a fixed-rate and an adjustable-rate mortgage

Benefits of Mortgage Refinancing

By refinancing, you can improve your financial situation. In particular, you can:

  • Lower monthly payment
  • Lower lifetime interest costs
  • Reduce risk
  • Get cash out for other purposes
  • Consolidate debt and possibly get tax benefits
  • Opportunity to use savings for investment alternatives

Disadvantages of Mortgage Refinancing

 

  • Prepayment fees – If there are prepayment fees attached to the existing mortgage, refinancing becomes less favorable because of the increased cost to the borrower at the time of the refinancing.
  • Closing costs
  • Loan term
  • Equity reduction

Examples – What a 3% difference really means.

200k loan @ 6.25% 200k loan @ 3.25% Savings
$1231 per month $870 per month $361 per month
$443,316 total cost $313,348 total cost $129,967 total cost

 That’s real $$$. Do not ignore this important opportunity to save money.

Resources:

  • Quicken Loans (www.quickenloans.com) – Providing valuable information resources and lending options for homeowners.

Important term!s from this lesson:

Term Definition
Mortgage Refinancing A mortgage refinancing transaction happens when you swap out an old loan for a new (ideally better) one. You pay off the old loan with the proceeds of a new one.

 

Action Step:       Watch and learn to find out if you should refinance your mortgage.