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You made the decision to refinance your home and now that the process is complete you have the opportunity to enjoy lower payments, you may have some extra cash in the bank because you took cash out of your equity but now you are considering what you should do to move forward. Here are some things you can do after refinancing that will improve your overall financial future.
Consider Extra Mortgage Payments
Now that your mortgage payment has been lowered on a monthly basis, you may want to consider the possibility of paying a little more towards your principal on your mortgage. One way to do this is to make a mortgage payment every two weeks instead of once a month. Here's how this works: You divide your mortgage payment in half, and you make a payment every two weeks in that amount. Over the course of a year, you will be making 13 full payments instead of 12 that you would normally make. This means on a 30-year fixed loan of $250,000 at a 4% interest rate you could save as much as $30,000 in interest over the life of your loan. Before you make this step make sure you find out the following:
- Will extra payments be put towards principal?
- Is there a prepayment penalty clause in your mortgage documents?
- Will the lender amortize your loan once a year?
- Will this mean my personal mortgage insurance payment will stop faster?
These are important questions because if there is no benefit to making advance payments, then it does not always make sense.
Increase Your Retirement Balance
If you have determined making an extra mortgage payment annually is not beneficial, another option is to increase your retirement account balance. Keep in mind, there are typically tax benefits to funding your retirement account which could mean you get a break on your taxes. This is another good use of the money you are saving on your mortgage payment since you are planning for your future as well as making good use of your savings.
Fund an Emergency Fund
We never know what curve balls life is going to throw at us and too many of us are under prepared for a crisis. Place some of your savings from reduced mortgage payments into a savings account. This means if your car breaks down, you need to make home improvements, or you decide a vacation is in order you will have the savings you need.
Pay Down Credit Card Debt
Another great use of the funds you are saving on mortgage payments after you have refinanced your home is to pay down some of your outstanding credit card debt. Pay attention to those cards with higher interest rates and either make larger monthly payments or pay them off completely. The interest you pay on credit cards is not tax deductible, and if you only pay the minimum amounts due, you will be paying a lot more interest than if you tried to pay down the debt faster. Keep in mind, reducing your credit card debt will also help your credit score because you will show a lower credit utilization which can boost your credit score.
Refinancing your home can provide your family with additional financial security, particularly if you make wise use of the savings. Whether you decide to simply save the money every month, use the savings for paying down other debt, or you are savings for a college education, many people find refinancing their mortgage gives them additional financial freedom. If you are in the D.C. Metropolitan area and are considering refinancing your home, or considering investing in a second home, contact First Savings Mortgage.
Please note, by refinancing your existing loan, your total finance charges may be higher over the life of the loan.