Over recent months many homeowners’ have taken advantage of the record-low interest rates to refinance their mortgage and lower their monthly expenses. If there is no specific plan on how to utilize these savings then it is easy to spend it on needless expenditure. So, if you have refinanced recently or planning to do so soon, here are some common options to put your savings to good use.
1. Make Extra Mortgage Payments
One great way of using these additional funds is to pay a little more towards your new loan principal. There are a few ways you can do this. One method is paying bi-weekly payments instead of monthly payments. This will help you pay one extra month a year as you will be making 13 full payments instead of 12. Or, you could just save the extra money in a savings account and pay one extra payment every year. This will help to shave off about three years of your mortgage payoff time, build more home equity, and save thousands of dollars on interest. However, before you take this step you must be clear on a few things with your lender like:
- Will the extra payments be put towards the principal?
- Does your mortgage document have a pre-penalty clause?
- Are there are any amortization factors?
- Will this mean that your PMI (personal mortgage insurance) will stop earlier?
Otherwise these extra payments will not make any sense at all.
2. Build Up Your Emergency Fund
The COVID 19 pandemic has taught us one thing and that is to expect the unexpected. Using the extra cash you save on your mortgage to start or add to your emergency fund will lessen the burden in an emergency. Otherwise, you will be forced to take on more debt or dip into other savings.
Here are a few scenarios that you need to save for:
- Six months to one year worth of living expenses.
- 1% of the total value of your home for repairs and annual maintenance.
- The total of your health insurance deductible (so that you do not have to stress out in a major medical emergency)
3. Beef Up Your Retirement Account
A high financial priority for many people is making sure they have sufficient money saved up for their retirement. Adding to your retirement savings with any extra cash will improve your potential comfort and lower the risk of post-retirement concerns.
For example, if you contribute say $200 a month for 20 years at 6% average annualized returns it will amount to $92,870 (by using a compound interest calculator). A smart way to allocate your refinance savings!
There are also tax benefits of funding your retirement account which can mean you could get a reduction of your total liability. Talk to your financial advisor and then decide on the best retirement savings strategy that suits your situation.
4. Spend On Home Improvements
If you have refinanced your home, it means that you intend to stay in your home for a long time. Therefore, making home improvements or renovations is worth considering. By putting money back into your home you could improve your home to fit your needs and style. Besides, if you plan your renovations strategically you can bump up the resale value of your home. Some renovations can afford you some tax benefits and maximize your savings too.
5. Pay Down High-Interest Debt
One of the key reasons to consider refinancing is paying down what you owe – especially significant high-interest debt like credit cards and personal loans. You can either use the “avalanche method” or the “snowball method” to pay down your debts. The avalanche method is paying off high-interest rate debts you hold first and working your way down to lower interest rate debts. Whereas, in the “snowball method” you focus on paying debt with the lowest balance first and then work your way up.
There are many benefits of paying down or reducing your high-interest debts:
- You will save big on interest rates.
- Gain peace of mind.
- Free up funds for other financial goals.
- Boost your credit score.
Save For A Goal
We all have at least one goal or dream that needs funds to turn it into a reality. This could be a dream vacation, purchasing a big-ticket item, or paying for the next car. By setting aside a specific amount of your refinance savings you will be able to reach your goal more quickly.
Planning to refinance your home? Get in touch today to learn more about your options.