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Long Term Benefits of Refinancing

Updated on May 13, 2009

Refinancing is a great way to save money on your monthly housing expenses. Paying less means you have more money in your pocket at the end of the month. This extra money can easily just ‘evaporate’ into your day-to-day living expenses. However, if you are disciplined, a bit of extra cash can go a long way towards improving your overall net worth. This article will briefly outline some possibilities.

It doesn’t take a huge amount of monthly savings to have a big impact on your long term future. There are typically 3 areas that can be addressed when someone wants to take advantage of these new found savings from a mortgage refinance to improve their net worth.

  1. Paying down other high-cost debt, such as credit cards and possibly auto loans
  2. Paying down the principle balance on your mortgage
  3. Investing the savings to address future goals such as college tuition or retirement

If you are carrying other debt, such as multiple credit cards or auto loans, it’s important that you compare their balances, interest rates and minimum required payments. Assuming you are able to meet the minimum required payments, you should prioritize the buy down of these debts by their interest rate, starting with attacking the highest rates first.

Let’s say that you have balances on 3 credit cards as follows: Credit Card 1 with a $4,000 balance at 16%, Credit Card 2 with a balance of $8,000 and a 12%, and a Car Loan for $21,000 at 4%. We’ll also say that you achieved a modest $175 in savings through your mortgage refinance.

If you were making just above the minimum payments on your 2 credit cards, it would take you 23 years to pay them off (if you didn’t add anything to the balance in the meantime). If you were to apply that $175 towards your credit card balances, this is the suggested approach:

Pay off the higher interest rate card first while still making minimum payments on the second. When that is gone, apply both the $175 and the minimum payment you were making to the first card to the second. By doing this, you could pay off both cards in just over 4 years. Much better than 23 years! Just think of the amount of interest costs you would be saving…

As you see, refinancing can make a lot of sense for your short term needs, but can also impact your long term financial goals as well. If you are interested in other mortgage related information, you can find it at Portland Refinance Help.


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