Refinancing
It would be nice to find piles of cash hiding in closets or under the beds. Most of us don't expect to find hidden money in our homes but you'd probably be surprised by how much equity you have in your home. Equity can be turned into cash with a home refinance.
Refinancing can be a big hassle but under the right circumstances, it might be worth the trouble. One reason would be to take advantage of lower interest rates. In the last few years the federal reserve lowered the prime rate, the rate that banks pay, to all time record lows. Even though rates have climbed from this all time low, it still might be lower than the rate you have on an existing mortgage.
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Lower interest rates can translate into lower monthly payments or the difference can be put towards paying off your home faster. For example, if you have a 30 year fixed rate mortgage of $225,000 that you took out in January of 2002 at a rate of 7%, your monthly payments would be $1,496. By the time you paid off your loan in 2032 you would have paid $313,895 in interest!
If you decided to refinance and plow the money back into an early pay off you could save a considerable amount of money. Using the example from above, the balance on your loan would be $214,817 in January of 2006. If you refinanced the $214,817 at 6% in a fixed 30 year loan, your payment would go down to $1,287.94. By the time you paid off the new loan in 2036, you would have paid $248,840 in interest. That's a savings of over $65,000 just in interest.
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Now, if instead of lowering your payment you kept the payment the same but used the difference to pay down the loan capital amount every month, you could save even more money. In the example above, we'd have an extra $209 to pay down the loan amount every month (1496 - 1287 = 209). By the time you paid off the loan in March, 2027, that's nine years early, you would have paid only $164,601 in interest. Your interest savings from the original loan would be $149,294. Now that's worth a little hassle.
This example doesn't take into account the cost of refinancing. If you roll the refinance charges into the loan, you're savings will be lower but it would still result in a big reduction on the total interest paid. Also, this assumes a 30 year fixed rate mortgage. All of these calculations get much more complicated when you add in variable rates.
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