Many mortgage lenders prey upon the idea of using the equity in your home to pay off credit cards. Others combine this with a cash-out pitch. While this may be tempting, it is not the best idea. Even though the rates may be lower, and you may end up with extra money each month, over the long run you’ll pay more in interest charges because you are paying over such a long period of time (most people refinance with a 30 year mortgage). Besides, even after you free up that $150-$300 per month, it doesn’t really do you much good unless you put it into savings, like in an IRA or a 401(k). Otherwise you’re still living paycheck to paycheck. Also, if you get another credit card balance, you will find yourself using your house as collateral against more consumer debt, and that rarely ends in a good way.
Refinancing can be a good idea, though. The key is to use savvy when refinancing so that you are doing it to actually save money. This way you keep more of your own money, and less of it goes to interest. The main rule of thumb when refinancing is to do so only when the going rate is at least half a point lower. This way the fees and costs associated with the paperwork and redoing the loan are worth the cost. Also, make sure that you are getting a fixed rate. If your current loan has a fixed rate and is even more than whole point higher than a new variable rate, it can mean bad news when the interest rates go up. You can figure out how much you can save by using the calculator on bankrate.com.
Instead of just refinancing for a 30 year loan, try to get a 15 year mortgage instead. This is a great way to save thousands of dollars in interest. The month payments may increase by $50-$150, but in the long run you will save a lot of money. For example, 20 years at 6.5% on $100,000 results in a monthly payment of $746 (plus taxes). If that loan is refinanced at 5.5% for 15 years, you will save $32,000 in the long run, even though your monthly payments are $817 per month (plus taxes). That’s quite a bit of money that you can use in retirement, instead of letting go to the bank for five extra years. Plus, most lenders offer lower rates for loans with a shorter time period.
Before refinancing, it is a good idea to carefully consider your options, and your motives for refinancing. Paying off credit card debt can be done rather quickly, if you make a plan, and it can be done much less expensively if you leave your house out of it. But refinancing the right way, without taking out extra cash, can save you quite a bit over the long run.