When to Refinance

Today I saw an article in my local newspaper which details the best reason to refinance. Perhaps the only reason to refinance. And that's saving money.

The article went through a scenario where a home owner started out with a $195,000 mortgage at 6 %. On top of that, this person had a large car loan and outstanding credit card balances to the tune of almost $40,000. Of course, the interest being paid on the car loan was 10% and the interest on the credit cards was between 18 and 28 %.

Of course, many people don't refinance because they are afraid of the penalty clause in their mortgage which charges them (fairly large) amounts to get out of their current mortgage. However, this is one of those places where you have to work out the numbers. In this case, the fees to get out of the mortgage early were $3,000. Now, that's enough money to make most people think twice. But you have to work out all the numbers.

In this case, the home owner took a variable rate mortgage at 3%, which is at a much lower rate of interest than most longer-term "locked in" mortgage rates. The amount of the new mortgage included the car loan and credit card debt as well as the costs associated with getting out of the original mortage. This put the new mortgage at $243,000. Comparing the costs of payments on the original mortgage and loans versus the new mortgage (no loans), the home owner was saving almost $1,000 a month! That more than makes up for the penalty to get out of the original mortgage.

Now, you might be wondering how you can even get a variable rate mortgage at 3%. Generally, a 3% rate would be an "introductory" rate, and the rate will go up after 6 months or a year. However, even if the rate on the variable mortgage gets as high as 6 %, you will still have saved for some time before you get there. And you've also eliminated your highest cost debt by converting it to a lower cost mortgage amount. It's well worth it.

Any time you can reduce how much you pay in interest costs, you are putting money in your own pocket. Adn that's where we'd all like more of our money to be.

Michael

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