5 Refinancing Tips to Put More Money Under Your Tree

Could you use a little more cash around the holidays?

According to the National Retail Federation, Americans will spend $602.1 billion this holiday season. If it seems like an overly large portion of that $602.1 billion is headed for your January credit card bills, then you need a strategy for putting some extra cash under your holiday tree.

Refinancing is a strategy that can both save you money in the long run and/or restructure your debt to make your cash flow more manageable. The following are a number of different ways you could refinance a mortgage to make more cash available for those holiday bills:

1. Lower your interest rate while you can.
Current refinance rates may be higher than they were earlier this year, but they are still unusually cheap. According to mortgage finance company Freddie Mac, 30-year fixed mortgage rates at around 4.3 percent are more than a full percentage point cheaper than they were for any year before 2009. So if you have been unable to refinance a mortgage in recent years because you lacked sufficient home equity or had credit problems, or if you simply didn't get around to it, you should act while refinance rates are still relatively low. With a lower refinance rate, you can both reduce your monthly payments and decrease the amount of interest you will pay over the remainder of the loan.

2. Match a shorter remaining term with a short-term mortgage to obtain a lower rate.
If current refinance rates don't represent much of a savings to you, consider whether you could refinance to a shorter mortgage term to reduce the rate even further. As of early December, Freddie Mac was reporting that 30-year fixed mortgage rates were running nearly a full percentage point above 15-year rates. Shortening your mortgage to obtain a lower rate should reduce the amount of interest you will pay over the remainder of the loan, but it could raise your monthly payment. However, the more years you have paid into your existing loan, the less of a change in monthly payment you should experience by shifting to a 15-year mortgage.

3. Consider a limited number of adjustable-rate mortgage (ARM) possibilities.
ARMs are not for everybody, and they are especially risky at a time like now when interest rates are low and likely to rise. However, data from Freddie Mac shows that ARM mortgage rates are about 1.5 percent below 30-year fixed mortgage rates. How can you take advantage of those low mortgage rates without getting burned later on by rising rates? The key is to use ARMs in situations where you will be paying off the mortgage within a few years, either because your existing mortgage only has a short time left, or because you are confident in plans to sell your home. In those cases, pay attention to the reset term (i.e., how soon the mortgage rate can reset) and the reset limit (how much the rate can change at any one time). Based on those conditions, you can figure out if you can refinance to an ARM without risking the ARM mortgage rate resetting to a level higher than your existing mortgage rate before you pay off the mortgage.

4. Lengthen your remaining term to spread payments out more.
One way to improve your current cash flow is to lower your monthly payments by refinancing to a longer mortgage. This is likely to mean paying more interest over the life of the loan, but if you are having trouble making ends meet and are at risk of defaulting on your current payments, this might be a worthwhile alternative.

5. Use cash-out refinancing to pay off credit card debts.
If you have some home equity, one way to access that equity is to do a cash-out refinancing. This will alter the terms of your mortgage like a normal refinancing, but it will also provide you with some immediate cash by borrowing against your home equity. The downside of this is that it increases the amount you have remaining on your mortgage, so you will probably pay more interest over the life of the loan. However, with credit card rates so high (averaging about 13 percent, according to the Federal Reserve), it may be cheaper to incur more debt at low mortgage rates to pay off debt at high credit card rates. Just be very sure you are confident of meeting the higher monthly mortgage payments that are likely to result.

The best kind of refinancing is when you manage to both lower your monthly payment and reduce the total amount of interest you pay over the life of the loan. However, paying more interest over the life of the mortgage can be worthwhile if restructuring your debt helps you pay off more expensive forms of debt or avoid foreclosure.

The right decision about refinancing should be one that not only puts more money under your tree this holiday, but which also makes your finances easier to manage in the years ahead.

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