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Refinancing: Lowering Your Payment? What Will You Do With The Money?

Last week we suggested that you take a look at your current mortgage interest rate and consider refinancing at the great rates that our mortgage lenders have.

Get your 30 year fixed rate under 5%. Wow! We have heard from several of you and we know that you are saving quite a lot of money. However even if it is only $200 a month, we recommend that you think long and hard about the best way to use that extra $200 that you are going to have!

If you are refinancing a loan that you have already had for several years, your best bet is to make sure that you amortize the loan over the number of years left on your loan that you are refinancing. That way you aren’t starting the amortization all over. Then see how much money you are saving and use that to decide where to put it to save the most money.

The next thing to do is to look at all the loans you have, car loans, credit card loans, credit lines, other mortgages. You should try and use the money to pay off interest, make sure that you know where you are in the amortization of the loan. This is the key. At the beginning of an amortized loan you pay a huge amount of interest and not much principal. These amounts gradually reverse until at the end of the loan you are paying mostly principal.

The place to put your new found money is against the loan that has the highest interest rate. However, here is the other thing to take into account. If you have almost paid off a loan that is amortized, you will see that most of your payment is actually paying down principal and not interest. So don’t be paying off that loan because obviously you won’t be saving much interest.

Generally, it is best to pay off your credit card debt because the interest rates on credit cards are almost always the biggest and these loans are not amortized. If you have several credit cards, cut up the ones that are paid off, cancel them officially in writing, and if you need to keep the cards active then make sure that you DON’T RUN THEM UP AGAIN unless you can pay them off each month.

You will find that all these steps will actually improve your credit score also, because a credit score takes into account your loan to income ratio, your assets, your loan payment history and the total amount of loan payment available on each credit card.

In today’s economy we are all looking for ways to save money and put it to its best use.

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