# 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.

Preet Banerjee
...is an independent consultant to the financial services industry and a personal finance commentator. You can learn more about Preet at his personal website and you can click here to follow him on Twitter.
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Showing 2 comments
• Traciatim

I know this is an old post, but why wouldn’t they just take a HELOC instead so that they have better payment flexibility?

• Preet

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.