With today’s low-interest rate environment, many people have decided to refinance their mortgages. Some traded a 30-year mortgage for a 15-year mortgage and kept their payments about the same, while others have a new 30-year mortgage and a lower payment.
For those of you who fall into the new 30-year mortgage category, listen up: If you’re not smart with the cash flow that you have created, you will ultimately find yourself in a worse financial position after you refinance.
So what are the steps you need to take?
1. Automate Your Savings
First, if possible, find a way to automatically save those dollars for your future. The best place to start is your cash reserve. If your cash reserve doesn’t already fall into the three to six months’ worth of expenses range, set up a savings account and have the money either direct deposited from your paycheck or automatically transferred to the savings account each month.
2. Look at Your Retirement Savings Plan
Next, look to your 401(k) or other employer-sponsored retirement plan. If you are not putting the maximum in already ($19,500 for those under age 50 and $26,000 for those over age 50), increase your contributions. Then, depending on your income level, consider funding a Roth IRA or a non-deductible traditional IRA. Do you have kids or grandkids? Consider putting the maximum per your state regulations for tax advantages to their 529 plans. Make the decision to improve your financial future an automatic task and take advantage of every tax-advantaged way to do so!
3. Pay Down Your Debt
Clients frequently ask me if they should roll their debt into their home loan. I am not a fan. While sometimes debt is incurred due to a one-off circumstance (i.e. my house flooded), it is more frequently due to lifestyle choices, like eating out more often or making unnecessary purchases that add up over time.
When you pay off the debt without changing your lifestyle, you usually find yourself back in the same predicament, and this time with less equity in your house. I wish this didn’t happen, but I’ve seen it happen too many times over the course of my career to count. If you do have credit card debt and you refinance, put the monthly cash flow automatically towards aggressively paying down the debt.
4. Pay More on Your New Mortgage
Finally, put the extra money that you are saving right back on the new mortgage – that way, you’ll pay the new mortgage off quicker than you would have the old one. This will put you in a better financial position for the long run.
In short, make this refinance really count for you. Put yourself in a better financial position in the long run. Don’t just extend the length of your mortgage at a lower interest rate. You’ll most likely need to take a little time to restructure how you are handling your finances, but it will be worth it. Make sure that the refinance has a positive impact on your future!
Cecilia Beach Brown Is a registered representative offering investment and advisory services through Lincoln Financial Securities Corporation, Member SIPC. Advisory Services are offered to residents of Maryland. LFS and its representatives do not offer tax or legal advice. Please see your tax or legal professional regarding individual circumstances. C Beach Brown, LLC, Pilot Financial Advisors and Lincoln Financial Securities are separate entities. LFS-3656340-070121