Now that rates are on the rise, refi junkies (you know who you are) will lose their annual windfall. July 30, 2003: 1:22 PM EDT
By Sarah Max, CNN/Money Staff Writer
BEND, Ore. (CNN/Money) -
If you're a homeowner, chances are you've cashed in on falling interest rates once, twice, maybe several times in the past few years.
It's been, quite literally, money in the bank.
Yet, "most people who've cut their mortgage payment let it go drifting to other places," said Barbara Steinmetz, a certified financial planner and enrolled agent. "Where does it go? Back into a lifestyle."
If you've gotten used to getting an annual refi bonus, brace yourself. Economists from all camps say mortgage rates will continue to rise steadily for the next couple of years.
Rates already have been on the up and up for the past three weeks, ending the week of July 25 at 5.94 percent for 30-year fixed loans according to Freddie Mac. (Click here for more info.)
How will you cope with life after refi?
In hindsight, here's what you should have done
Built an emergency fund. The first thing you should do with extra cash, be it from a raise, a tax rebate or refinancing savings, is put an emergency fund in place if you don't already have one. Financial planners typically recommend having three months of living expenses in the bank.
Paid off high-interest debt. For Raymond and Christine Baranak, refinancing was an opportunity to eliminate the $20,000 in credit card debt they accumulated shortly after buying their house in 1994. "New drapes, grass and everything else that comes with the house cost more than we ever planned," Raymond said.
After refinancing five times, the Mokena, Ill. couple trimmed their mortgage payments from $1,800 to $1,200, sending everything they saved, and then some, to their creditors.
Last year when their credit card debt was finally gone, they refinanced yet again, only this time they shortened the term to 15 years. Today, their monthly payments are back at $1,800, but the Baranaks will pay off their mortgage in about half the time.
Saved for the long term. The couple hundred bucks you save on your mortgage may do little to change your lifestyle now. But if you invest it, it could make a world of difference in your child's college fund or your retirement plan.
Last week Frank Brock and his wife Robin Yaure closed on their fourth refinance in three years. All told, the Ijamsville, Md., couple has cut $350 off their original monthly mortgage payment, now $1,500.
Before they had a chance to blow their windfall, the Brocks set up 529 college savings plans for their children, who are 4 and 8. Each month they contribute about half their refi savings to the fund. The other half goes toward a home equity loan used for a basement renovation, an investment that also should pay out in time.
"You've got to get that money off the table and put it toward other goals," said Steinmetz, who herself just refinanced in order to reduce the term of her loan.
What you can do to save now
If you have just closed on your latest refinance, it's probably not too late to get a grip on your savings before it gets lost on the way to the mall.
If, however, enough time has passed and you couldn't possibly imagine not having that extra money at your disposal, you'll need to ease into a savings plan.
Whether the money is for an emergency savings fund, college or retirement, you'll want it taken out automatically each month. Start small by either increasing your contributions to your 401(k) by 1 or 2 percentage points or by putting a set amount in a savings account each month.
Chances are you won't even miss that money. Once you realize how painless saving can be, increase your contributions.
Going forward, be smart about future windfalls. Maybe it's too late to get a grip on every dollar you've saved by refinancing. But you can capture raises (the real kind) by saving the extra cash before you ever have a chance to spend it.
Raise or no raise, your paycheck should be a little bigger because of changes to the tax law. (See "Bigger Paychecks".) A married couple making $75,000, with two children will save an extra $40 a week and may qualify for the advance child tax-credit checks now in the mail.
Right there is more than $2,800 a year you might otherwise let drift away.
