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calculator to generate an amortization schedule for your current
mortgage. Quickly see how much interest you will pay and your
principal balances. You can even determine the impact of any
Refinance To Build
Many borrowers use a refinance to shorten the term of the
mortgage. And brace yourself, even at low rates, a shorter term
means a higher monthly payment. The benefit is that you'll build
up equity faster and pay far less in total interest over the
life of the loan.
Consider Jim, 48, a real estate agent and his wife Sarah, 55,
a teacher. Recently, the couple took out a 15-year fixed
rate loan at 6.75% to replace an 8.13% ARM with a 30-year term.
Their monthly payment jumped by $200, but now they will own
their own home outright by the time they retire. In addition,
the total interest on the 15-year loan will come to $95,447, vs.
$222,234 on the remaining life of the ARM -- and that assumes
their adjustable rate would have held steady at its current
8.13%. "This is forced savings," says Jim. "When we retire, we
can scale down and take equity out of the house."
If you can't afford the payments on a 15-year mortgage, your
next best means of building equity is to refinance for less than
30 years. To do so, ask your mortgage company to customize your
new loan's term to match the years that are left on your old
loan -- if you are five years into a 30-year mortgage, for
example, ask for a 25-year loan.
Cash Out Refinance
- Tap Into Your Equity
Another way to make a refinance work for you is to refinance
for more than the balance remaining on your old mortgage -- in
effect, tapping your home equity, or "cashing out," in mortgage
speak. Thanks to favorable rates, you may be able to do so
without boosting your monthly outlay. For example, at 8.5%, the
payment on a $200,000, 30-year fixed rate mortgage is $1,538.
But at 7.5%, that same payment lets you borrow nearly $20,000
The best use for the extra cash is to pay off any higher rate
loans you may have. Let's say that you are carrying a $15,000
car loan at 10% and making minimum payments on a $10,000 credit
card balance at 17%. Your monthly payments on those debts would
total $680. Then assume you refinanced your mortgage, taking out
an additional $25,000 to pay off your car and credit card loans.
Result: At 7.5%, your additional monthly mortgage payment would
total only $175, so you would come out $505 ahead
Of course, all the extra cash needn't go for paying off
debts. When one family swapped their ARM for a fixed rate last
December, they also increased their mortgage load by $34,000,
from $106,000 to $140,000. They used $3,000 of the proceeds to
pay their refinancing costs and another $17,000 to pay off a 10%
home equity loan, which had been costing them $250 a month. Then
they spent the remaining $14,000 to build a garage for their
antique car collection -- and they did all this for just another
$19 a month.
ARM Refi - Trade
Your ARM for a Fixed Rate
By switching to a fixed rate loan, you will not only reduce your
payment, you will also likely lock in an attractive rate for as
long as you own your home.
In fact, while one year ARMs currently offer tempting
introductory rates averaging 5.59%, most experts recommend
avoiding them, because you could easily find yourself facing
sharply higher payments in the near future, even if interest
rates don't rise. Why? Well, after the introductory rate
expires, ARMs are typically pegged to the one year Treasury rate
(recently 5.25%) plus 2.75 percentage points, with increases of
as much as two points a year. Assuming interest rates don't
change, you would pay 7.59% in the second year (the full two
point increase) and 8% in the third year.
There are certain cases, however, where an ARM makes sense.
If you are fairly certain you'll be moving within five years,
you can save some money -- and avoid rising payments -- with a
five year ARM, recently averaging 6.62%. Such loans offer a
fixed rate for five years and adjust annually thereafter.
Low Interest Rates
- Pay Points to Lower Rate
In refinancing, a mortgage company usually offers a range of
interest rates at different amounts of points. A point equals
one percent of the loan amount. For example, three points on a
$100,000 mortgage loan would add $3,000 to the refinancing
Analyzing various interest rates and associated points may
save you money. As a rule of thumb, each point adds about one
eighth to one quarter of one percent to the interest rate the
mortgage company is offering.
Generally, the lower the interest rate on the loan, the more
points the lending institution will charge. Some companies offer
refinancing with no points, but generally charge higher interest
To decide what combination of rate and points is best for
you, balance the amount you can pay up front with the amount you
can pay monthly. The less time that you keep the loan, the more
expensive points become. If you plan to stay in your house for a
long time, then it may be worthwhile to pay additional points to
obtain a lower interest rate.
Some companies may offer to finance the points so that you do
not have to pay them up front. This means that the points will
be added to your loan balance, and you will pay a finance charge
on them. Although this may enable you to get the financing, it
also will increase the amount of your monthly payments.