While rates have certainly gone up since this time last year, rates are still historically low. That said, the Fed is still looking to raise rates so if you missed the trophy rates last year, don’t worry – refinancing today will still give you a great rate, but remember that it’s only going up from here! But why do people refinance? Let’s take a look at the four biggest motivations we typically see.
#1 – Lower the rate and payment. Straight forward. Pay less to live in the same house.
#2 – Pay off the loan faster
#3 – Consolidate the first mortgage with a home equity line balance
#4 – Take cash out for home improvement or to pay off other debt
There has been big change recently on loans of $484,350 or less — you can now pay off credit cards with proceeds of a refinance and ignore the minimum payments on the card balances that are being paid off.
Let’s say you have $20,000 of credit card debt with $400 of minimum monthly payments. If you refi and we pay off those credit cards at closing on a 30-year fixed rate mortgage, the additional $20,000 you’re borrowing on the mortgage adds $93 to your monthly payment. So you go from $400 to $93.
If the rate is 18% on the credit card debt, the $400 monthly payment will get the debt paid off in 7.8 years and you’ll have paid $16,800 of credit card interest.
By tacking the $20,000 onto a new 30 year mortgage, you’re taking a longer time to pay it off, but even over the 30 years, the interest expense will be $2,000 less than leaving it on the card because the rate is so much lower.
If you go with a 20 year fixed, that extra $20,000 on the mortgage will cost you $118 a month compared to the $400 if you leave it on the card. Interest savings will be almost $7,000 by moving the debt to the mortgage.
If you go with a 15 year fixed, the $20,000 on your mortgage amounts to $143 a month vs. $400 on the card and you’ll save over $9,500 of interest compared to leaving the balance on the card.
WARNING – if you shift the debt from your credit card to the mortgage and then run up the balance on the credit card again, that’s not good. We’re probably just enabling some bad spending habits at that point.
But for those who need a fresh start, refinancing those debts can get you there.
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