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Refi Cash Influx

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Posted On: 08/22/2012

ANSWER:

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.

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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 peter@ctwfeatures.com.

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