One way to make refinancing work is to refinance for more than the balance remaining on your old mortgage. In the mortgage industry this is known as “cashing out” or tapping into your home equity. With favorable rates, you may be able to do so without adding to your monthly outlay. For example, at 8.5%, the payment on a $200,000, 25-year fixed rate mortgage is $1,538. But at 7.5%, that same payment lets you borrow nearly $20,000 more.

So now you have $20,000.00 what do you do with it; pay off any higher rate loans. For example you have a car loan for $15,000.00 at 10% and a credit card balance of $10,000.00 at a rate of 17%. Your total monthly payments on these debts would be $680.00. If you refinance your mortgage; taking $25,000.00 to pay off the car loan and credit card debt and the refinance rate is 7.5% your additional monthly payment would be $175.00 saving you $505.00 a month. That is your previous payment of $680.00 minus your increase in your mortgage payment of $175.00 saves you $505.00.

This is of course the best use of the extra money, but doesn't have to be the only option. When the Smiths swapped their ARM for a fixed rate last July, they also increased their mortgage load by $34,000, from $106,000 to $140,000. They used $3,000 of the proceeds to pay their refinancing costs and another $17,000 to pay off a 10% home equity loan, which had been costing them $250 a month. Then they spent the remaining $14,000 to build a garage for Steve's woodworking shop, and they did all this for just another $19 a month.