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.