Example 1: Free Cash Flow
Having debt such as credit cards, installment debt, auto debt, and even student loans; make up monthly payments that consume a large percentage of your monthly income. You may be able to refinance your home and use the equity to jump start the 4 Step Mortgage Plan. By creating cash flow and reducing the burden of higher required monthly payments; this could allow you to use those previously allocated funds towards an aggressive savings plan.
Here's an example of how it could work:
Current monthly payments:
- Credit cards: $500
- Auto loan: $450
- Student loans: $250
- Installment dept: $150
- Current mortgage: $1,500
Current monthly payments: $2,850
New monthly payment (your new mortgage payment): $1,950
By using your equity to pay off your debts, in this example, you'd create $900/month in new cash flow to deposit directly to your new savings plan...that's $10,800/year. If you have a budget in place and discipline to stick to the plan, you can do it! You were making the same payments towards all the debt before, now you are making all those payments to yourself.
EXAMPLE 2: no Cost rate reduction
In an environment where rates are dropping, you may be able to lower your mortgage payments and maintain your current mortgage balance without having to pay out of pocket closing costs. This would allow you to secure a lower rate and reduce your monthly mortgage payment.
| ORIGINAL LOAN |
||
| Starting Loan Balance | Rate | Monthly Payment |
| $250,000 | 5% | $1,342 |
|
NO COST REFINANCE (AFTER 2 YEARS) |
||
| $242,000 | 4.5% | $1,226 |
In this scenario your loan balance remains the same, which lowers your mortgage payment by $120.00. There is “no cost” to do this as the market is handing you a lower rate. Note, taxes and insurance payments will remain in all scenarios.
