Reduce Spending By Refinancing Debts

If you are saddled with student loan debt, mortgage debt, or any other loans where your interest rate seems high, have you ever considered refinancing? For the most part, refinancing your loans means that a lender pays off your existing loans and creates a new, single loan to be paid back at (ideally) a lower interest rate. Many choose to refinance because it consolidates your monthly loan payments, but don’t forget that this strategy can lead to huge savings over time. And remember, you’re not adding new debt when you refinance; you’re simply moving your loans to new loan products with better terms.

Interest rates are extremely low now as well, which means you can refinance today and lower your payments for years to come. Plus, money gleaned from refinancing is really just “found money” you can spend elsewhere in your budget.

How much can you save? Imagine for a moment you have a 30-year home loan for $250,000 and your interest rate is 4.5% APR. In that case, you would pay $1,267 per month in principal and interest on your loan for a total cost of $456,017. However, the same loan with a 3.5% APR would only cost you $1,123 per month and $404,140 in principal and interest payments over that time. This means a single percentage point off your loan would help you achieve over $50,000 in savings.

The exact same rule applies to student loans and other debts you have, which is why you should take the steps to refinance at a lower rate if you can. 

Jeff Rose, CFP® December 29, 2020

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