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Refi Cash Influx
Let’s imagine that you refinance a $140,000 mortgage. At closing, you’ll pay an additional $3,000 in various costs, plus $4,000 to fund an escrow account for taxes and insurance. You get a new loan for $147,000 – enough to pay off the old loan, plus all the costs of closing, without paying any cash upfront. Your new loan payment will be $150 less as a result of refinancing.
It would seem as though no cash would flow out back to you, but that’s not quite the case.
First, you will likely bypass one monthly loan payment – let’s say $1,100 in this case. That’s because your original loan is paid off, and typically you will not begin paying your new monthly payments until a month later.
Second, any money remaining in the escrow account from your original loan will be returned to you – let’s say it’s $3,500.
If you count your unpaid mortgage payment ($1,100) plus the refund from the first lender ($3,500), the resulting “cash back” will be $4,600 in this example.
You could use this money to pay down the new mortgage by making a prepayment when the first payment is due. However, mortgages today have rates that are often at 4 percent or less – a ridiculously low rate by historic standards. You might also stick the money in a savings account.
An alternative choice is to look at other debts. It may be far better to pay down credit card debt than to prepay the mortgage. Paying off a $4,600 credit card bill would substantially reduce monthly costs.
In a sense, the loan officer is right: In a roundabout way, you will get back cash. The real questions are, how much and what will you do with it? It’s a real opportunity for many households to reduce debt and monthly costs beyond the benefit of a new mortgage. For specifics, speak with your lenders.
Peter G. Miller is the author of The Common-Sense Mortgage and a veteran real estate columnist. Have a question? Please write to firstname.lastname@example.org.View Foreclosure Article Archives
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