A refinance mortgage is a loan that replaces an existing one. It's a brand new loan and has its own set of necessary closing costs. Consumers refinance to lower an interest rate or change the loan term but they can also refinance in order to pay off other debt. Is it worth it?
Pulling equity out of a property in the form of cash is called a cash-out refinance. This is in contrast to a refinance that only replaces the old loan plus finances associated closing costs such as title insurance or escrow charges. Sometimes though, paying off other consumer debt while refinancing is something to consider.
For example, a borrower has a $300,000 30 year fixed rate today at 5.00 percent and the monthly payment is $1,610 per month. By refinancing into a new 30 year fixed rate loan at 3.25 percent, the payment drops to $1,305. That's a lot. But consider that same borrower has an outstanding automobile loan with a balance of บ้าน มือสอง $20,000 on an interest rate of 6.00 percent on a six year loan. The monthly payment on the car is $386. But if the borrower increased his loan amount to $320,000 and paid off the auto loan, the $386 disappears and the house payment goes up slightly to $1,392.
Still lower than the $1,610 per month payment and removes the car payment of $386 for a net savings of $600. Other consumer debt may also be paid off during a cash out refinance and doing so can have some definite cash flow advantages.
However, understand that replacing consumer debt with a cash out mortgage loan will lower a monthly payment but the car is financed over 30 years, not five, meaning long term interest charges will be greater. When considering a cash out refinance, don't just look at the monthly payments. You need to pay attention to the long term interest effects as well.
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