Congratulations! You’ve taken advantage of record-low interest rates and refinanced your mortgage. By now, you’re likely seeing a boost to your personal finances in the form of extra savings each month. But consumers should skip the spending spree and instead focus on how to make those extra pennies work both smarter and harder.
When mortgage rates are as low as they are now, there are few disadvantages to refinancing. If you crunch the numbers through Credible’s free online tools, you can see the potential savings for yourself.
In case you are wondering if it’s worth the hassle of going through the mortgage refinancing process, the benefits far outweigh any disadvantages. Not only does refinancing typically lower your monthly payment, but you can also refinance your loan into a shorter loan term (if you so desire), and build equity faster.
4 money moves to make with your refinance savings
Once you’ve secured the lower rate and closed on your refinance loan, here is what to do with the extra money you’ve just recouped.
- Pay off your mortgage quicker
- Pay off other debt
- Contribute to retirement
- Build up emergency savings
If you haven’t yet refinanced your mortgage, then you should compare rates and get started on the application process now. Don’t leave money on the table!
1. Pay off your mortgage quicker
If you are “team pay as little in interest” as possible, it’s best to leverage your mortgage refinance savings to pay down the mortgage as quickly as possible.
To illustrate this, for someone who realized $300 in monthly savings, putting this extra amount toward a $300,000 mortgage at 3% interest each month will shave 8 years and 2 months off of a 30-year loan.
Even if you prefer to keep the extra money in the budget on a monthly basis, even one extra payment per year can significantly shorten your mortgage payoff time. Contributing $1200 extra dollars a year will shave three years off the payoff timeline and save $20,000 in interest over the life of the loan.
2. Pay off other debt
If you have high-interest debt, other revolving debt, or debt from student loans, the extra savings from the mortgage refinance should be allocated to reducing your overall debt burden. After all, the less you owe and the faster you pay it off, the less you’ll pay in interest over time.
Let’s say a homeowner realizes $200 in extra savings from a mortgage refinance but has $17,000 in credit card debt. By adding $200 on top of the minimum payments, this homeowner could pay off all their credit card debt in about six years. Without the additional payments, it would take over ten years to pay off this amount.
If those mortgage refinance savings are already allocated, debt consolidation is still an option if you’re struggling. And there’s good news: borrowers can also shop debt consolidation loans and student loan refinance options via Credible and compare rates and lenders with ease.
3. Contribute to retirement
In the thick of the COVID-19 pandemic, it can be hard to imagine the distant future or even the next few months. Eventually, though, the pandemic will pass, and you’ll still need income to live off of in retirement.
Using a compound interest calculator, even if you’ve contributed zero dollars in your 20s and 30s, $250 in mortgage refinance savings contributed monthly at 7% averaged annualized returns in your retirement accounts will yield $284,000 30 years from now.
The lesson? It is never too late to start, particularly when it comes to something as expensive as funding years in retirement.
4. Build up emergency savings
If the pandemic has taught Americans one thing, it is to expect the unexpected.
As COVID-19 numbers continue to rise nearly nine months later, it is never a bad idea to pad the savings account. Here are just a handful of “just in case” scenarios to save for:
- At least a year’s worth of living expenses.
- One percent of your home’s total value for repairs and yearly maintenance.
- The amount of your health insurance deductible (so you don’t have to financially sweat a major medical emergency.)
- An emergency fund for any family pet.
Even when it comes to savings accounts, consumers should still investigate multiple options as not all financial institutions offer the same rate. No matter how much you have to deposit, you can save more with a high-yield savings account (as opposed to a more traditional savings account).
As you can see, saving more money by refinancing your mortgage is only the beginning. Borrowers can’t know exactly how much they can save until they begin reviewing interest rate options. To take the hassle out of rate shopping, consumers should visit Credible, where they can view loan options across multiple lenders in minutes, and with fewer forms to fill out.