Refinancing your home Part 2: An Example
Okay let’s show how an actual couple ended up freeing $915.80/month by refinancing their home. I’ve rounded the numbers, but they are from a real life scenario. We’ll begin with a snapshot of what their financial situation was BEFORE:
Home Value: $250,000
Mortgage: $150,000 balance, 20 years left, 6% interest rate = $1,070 Monthly Payment
Credit Card Debt: $10,000 balance, 18.8% interest rate = $500 Monthly Payment
Vehicle Loan: $26,000 balance, 8% interest rate = $500 Monthly Payment
Department Store Charge Cards: $5,000 balance, 28.8% interest rate = $250 Monthly Payment
In this case, they have a total debt obligation of $191,000 and total monthly payments of $2,320.
By refinancing, they were able to take out $41,000 of equity from their house to pay out the vehicle loan, the credit cards and the department store charge cards. This increases the mortgage from $150,000 to $191,000. Plus, let’s add a $5,000 charge to break their existing mortgage for a total new mortgage balance of $196,000.
However, that entire amount is now being charged 6% interest and amortized over 20 years. The new mortgage payment is $1,404.20. …but that’s the only payment.
So: Old Total Monthly Payment ($2,320.00) – New Total Monthly Payment ($1,404.20) =
$915.80 Saved Per Month
Take this with a grain of salt. You have to factor in the trade-offs. Yes, you free up a lot of money monthly, but it has to be put to good and productive use. Also, before they would have freed up the $500 monthly vehicle loan payment in 4 years anyways, but now they blended it into a 20 year mortgage, effectively paying for that vehicle for 20 years. In many cases, these trade-offs are more than acceptable to people who are looking into refinancing as they are in dire need of a short term solution and even just a little breathing room is enough of a dangling carrot for them to proceed. In this particular case, a $915.80 monthly savings was very compelling and they are currently saving $700/month out of that into an investment account.
Tags: amortized, color border, credit card debt, department store, existing mortgage, financial situation, google, grain of salt, home value, life scenario, loan payment, mortgage balance, mortgage payment, new mortgage, store charge cards, trade offs, vehicle loan, year mortgage
Popularity: 1% [?]
Credit Repair - option trading<--Please click on the green Retweet button if you like this article and want to share it on Twitter!
You might like these Related Articles:
You are correct if you have a lot of equity in the house you will either be required to ...
With competent representation most people can keep their homes. The Trustee in Bankruptcy is required to represent the interest of ...
I'm concerned about the accuracy of some of the information in this post. For example, it's not necessarily true ...
I had a great time reading around your posts as I read it extensively. Thanks for writing about this! 
No wonder bankruptcy is growing among Canadians, at the end of September 2009 (the most recent numbers available), the average ...
Preet, you are becoming a regular media whore :) See you on the 18th at Financial Horizons talk in ...
Hi Preet - I wonder if you can help me answer a question about re-payments following Home Buyer Plan RRSP ...
@Jim - it depends on the broker. Shorting securities will always require the commission to sell, and interest charged on ...
Preet, are you sure that investors are always charged a fee for selling short, or is that just the rule ...
Comment by Traciatim on 13 October 2007:
I know this is an old post, but why wouldn’t they just take a HELOC instead so that they have better payment flexibility?
Comment by Preet on 13 October 2007:
Good question. That can be an option depending on a few factors, most of them subjective. Sometimes a HELOC (Home Equity Line Of Credit) can compound their problem. You have to understand the nature of their problem isn’t that they are bad at math – they view credit as entitlement. In other words if you give them a line of credit for $10,000, it will be close to maxed in short order. Normally the people who are ready for a refinance are those that have multiple lines of credit, credit cards and department store cards, etc. Drastic times call for drastic measures.
A refinance is more than just a financial strategy, it can be the start of a control-alt-delete for their overall financial philosophy. They have been spiraling into worse and worse of a situation and an "intervention" was required.
In any case, while a HELOC might be a good choice for those who are normally very good with their budgeting but are temporarily under the gun, a refinance may be reserved for those who are further a-stray.
In such cases, it would be wise to have a professional advisor force them to cut up and cancel their cards, and monitor them quite closely for the first few months after the refinance – otherwise they can get themselves into even MORE trouble with the new found cashflow and perception that they fixed the problem. Remember the problem is a psychological one.
Excellent question.