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Is it worth tapping your savings for a cash-in mortgage refinance?

[Jul 20, 2011.]

 

According to Freddie Mac, during the first quarter of 2011, 21 percent of homeowners who refinanced reduced their principal balance by bringing money to the settlement table. For some homeowners, the choice may have been a simple calculation that they wanted to pay off their mortgage faster. Others opted for a cash-in refinance in order to qualify at all for a new home mortgage.


Mortgage rates and refinancing


The median interest rate reduction for all mortgage refinances in the first quarter of 2011 was 1.2 percentage points or a savings of about 20 percent in interest costs, according to Freddie Mac. On a $200,000 loan, borrowers would save over $1,800 in interest payments.


If you are considering refinancing, check today's mortgage rates to make comparison with your current home mortgage and calculate your potential savings.


Home mortgage refinancing options


If you are underwater on your mortgage and have cash in the bank, you may want to consider the benefits of using some of your cash to refinance your loan. Calculate how much you will save each month with the lower mortgage payment and your overall interest savings on the loan to see if this is worth reducing your savings account balance. Don't forget to estimate closing costs for your mortgage refinance.


If you have less than 20 percent equity in your home, you will need to pay private mortgage insurance (PMI), so make sure you add that cost to your estimated mortgage payments. For borrowers with almost 20 percent equity, bringing cash to the table to eliminate PMI payments may be a smart move, because your monthly payment could be significantly reduced once you combine the interest savings and PMI savings.


Mortgage loans and cash


Before jumping into the decision to refinance, think carefully about your overall financial situation. If, for example, you have substantial debt to repay to credit card companies or on a student loan, you may want to use some of your cash to reduce the balance on those debts. Another option is to go ahead and use the cash to refinance and then apply the savings on your mortgage to accelerate your credit card debt reduction plan.


Remember to consider the long-term consequences of extending your home loan. For example, if you are nearing retirement age you may not want to refinance into a 30-year mortgage without considering the impact on your retirement finances.


A mortgage calculator and a debt payoff calculator can help you evaluate each of your options for refinancing or for using your available cash for paying off debt.


For refinancing options in your area, go here.


 

About Author:

Michele Lerner is a freelance writer with twenty years of experience writing articles and web content for newspapers and magazines on topics related to real estate, personal finance, and business.

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