mortgage

Answers to 6 key refinance questions

5. Does a cash-out refinance for home projects make sense? 
First, find out whether you'd end up with both a lower monthly payment and a shorter loan term. If your credit is good and the house appraises well -- no sure thing with today's falling home prices -- refinancing may be a slam-dunk.

For example, let's say a consumer can go from a 9 percent loan to around 5.25 percent on a 15-year fixed-rate loan. The borrower would end up with lower monthly payments and a shorter loan term. Refinancing is a great choice.

Does it make sense to refinance?
 Existing loanRefinancingDifference
Loan balance:$99,000$99,000 
Interest rate:9.00%5.25% 
Loan term (months):210180 
Payment:$937.77$795.84$141.93
Total payments:$196,932$143,251 
Total interest expense:$143,251$44,251$53,681

You can use Bankrate's mortgage calculator to create your own table using the actual balances, interest rates and loan terms. Even if you have to pay a few thousand dollars to close on the new loan, the interest savings combined with the shorter loan term provide a great incentive to refinance. Bankrate's refinancing calculator will estimate how long it will take to recoup your closing costs given the lower mortgage payment.

Does it make sense to spend money on home improvements? If you accept that you're not going to get back every dollar you put into the house and that the benefit you get from the improvement is what balances out the equation, then it may make sense to remodel or renovate your property.

The following table takes a look at the cost of doing a cash-out refinancing for $20,000. It ignores the closing costs associated with the financing. You'd have a monthly payment about the same as you have now on your mortgage but you'd be able to finance $20,000 in improvements and still have the loan paid off 2.5 years before your original mortgage.

The cost of cash-out refinancing
 RefinancingCash-out refinancingDifference
Loan balance:$99,000$119,000$20,000
Interest rate:5.25%5.25% 
Loan term (months):180180 
Payment:$795.84$956.61$160.78
Total payments:$143,251$172,191$28,940
Total interest expense:$44,251$53,191$8,940

Assuming your home hasn't lost too much value in recent years, and depending on the cost of your projects, you should be able to do a cash-out refinancing without paying private mortgage insurance (PMI) on the loan. If the loan-to-value on the cash-out refinancing will be over 80 percent, you should consider other financing options before deciding how you'll finance the home improvements.

6. Should I refinance to pay off an auto loan? 
Restructuring your debt load to pay off your car loan with mortgage debt can make sense if: (1) you can use the mortgage interest deduction on your taxes; (2) the after-tax rate on the mortgage loan is less than the interest rate on the car loan; (3) there isn't a prepayment penalty on the car loan; and (4) you have sufficient equity in your home that borrowing the additional $27,000 won't cause you to pay private mortgage insurance on the mortgage debt.

There are some drawbacks. Paying off your car over 15 to 30 years will negate any savings from a lower interest rate, not to mention the debt hangover you'll have when you go to buy your next car and you're still paying off the old one.

Both auto loans and car loans are secured loans. If you don't make your car payment, the lender can have your car repossessed, but if you don't make your mortgage payments the lender can foreclose on your home.

When deliberating about whether to take this step, look at the refinancing as a stand-alone decision. Does it make sense to refinance to capture an interest rate 1.25 percent lower than your current mortgage? It may not if you only plan on being in the house for a few years and closing costs are expensive.

Bankrate's refinancing calculator will help you determine how long it will take you to recoup your closing costs from the lower monthly mortgage payment.

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