If you refinance, one of the immediate effects may be more room in your budget. This can happen if you refinance to a longer loan term, lower interest rates, or both. Your monthly payment amounts will go down, which may leave you with extra spending money each month.
This can be a very welcome change, but it is one that requires you adapt to it so you can make the most of it. Here are some tips for how to manage your budget after you refinance.
- Calculate what you can now afford. The first thing you should do is figure out exactly how much extra room you now have in your budget. Calculate the amount that has been freed up once you account for all your other expenses. If you were in the red before, you might be less in the red now, or breaking even, or you could finally be in the black. If you were breaking even or had very little extra money before, you might now have significant extra funds available each month.
- Consider paying off high interest debts. If you have been struggling with high interest debts, you may want to pay some of them off quickly, assuming you can now afford to do that. Note that another approach is to consolidate high interest debts when you do the refinance in the first place. You can roll them into your mortgage debt, which carries a lower interest rate.
- Spend a few months budgeting exactly like you used to. Often what happens when people’s incomes go up is that their expenses take a jump upward as well. This may even happen without really thinking about it. It’s called “lifestyle creep,” and you should be wary of it if you just refinanced your mortgage to free up monthly funds. A good way to prevent this problem is to keep following your old budget for several months after you refinance. Keeping your old routine intact gives you time to adjust your emotions and get a better feel for your new financial scenario. Once the initial excitement of having more room in your budget wears off, you are less likely to spend impulsively.
- Proceed with a new budget designed to help you achieve your goals. After you have taken a few months to get used to having more room in your finances, you can create a new budget to use going forward. Decide how you are going to allocate the money that you have freed up through your refinance. Are you going to put it toward extra mortgage payments? Home improvements? Savings and investments? Come up with a concrete plan, then follow it with discipline. This will help you make progress toward your financial goals. Remember, you can automate sending money over to investment accounts each month. That can make it easier to stay on target.
Refinance in Blacksburg or Beyond
First Residential Mortgage can help you refinance or buy a home in Blacksburg or anywhere in Virginia. To get started, please give us a call at (540) 838-5868 to schedule your mortgage consultation. We can help you figure out how much you could save with a refinance, and walk you through the steps to apply.
