Quote:
Originally Posted by Xist
Redpoint, I did not realize that refinancing mortgages had closing costs. You basically replace one mortgage with another? My ten-day fiancée refinanced her home and they gave her $800, which she happily spent.
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When a person has a mortgage, they have equity in their home. Equity = the current market price of the home - the amount of debt remaining on the loan.
If a home is worth $200,000 and the principal amount left on the loan is $150,000, the equity is $50,000.
It's possible, as was common in 2006, for the value of the home to fall below the amount remaining on the mortgage. This leaves people with negative equity. Example home value is $100,000 and the amount owed on mortgage is $150,000 = -$50,000 equity. This is why people were foreclosing on their homes in droves. It's not that they couldn't afford their mortgage, because their monthly payment didn't change; it's that they could walk away from their mortgage obligation and the associated negative equity. Having zero debt by foreclosing (the bank takes back all ownership) and having no equity makes more financial sense than having negative equity (owing more than it's worth).
In your fiances case, she had some equity in the home and got a "cash out" refinance. This means she borrowed more money than she needed to, and will have to repay that amount with interest in the future.
If I had ANY debt at all besides the mortgage, I would probably do a cash out refi and pay off those debts. Mortgage debt generally carries the lowest interest rates since the loan is secured by the home. Also, interest payments on mortgages are tax deductible. You could essentially turn your credit card debt into mortgage debt by getting a cash out refi, and deduct the interest on your taxes.
I wasn't sure if I could pay the second year of medical school for my wife, but I still declined school loans. My plan was to take out a HELOC (home equity line of credit), which is low interest and backed by the equity in my home. It's also tax deductible, and the debt is erased if you foreclose, unlike school debt which cannot be erased through bankruptcy.
Debt and savings act as a time machine for money. Putting money into savings is paying now for future purchasing, and debt is purchasing now with future payment. Both have opportunity costs involved.