How to Save over $1,225 a month

Where refinancing can help you save.

The spring market in Alberta is picking up, but where I’m spending most of my time isn’t with purchases, but with refinances.

Why refinance?

There are many reasons to consider refinancing. From carrying debt due to unexpected financial duress, health, lost income, as well as planned refinancing due to home renovations/upgrades, etc.  

But the primary reason to refinance is to reduce financial stress by minimizing monthly cash outflow and lowering overall interest costs. 

As you know, I’m about the perspective of Bulletproofing your Lifestyle. The primary building block to this is via savings obtained from increasing one’s disposable income.  

The easiest way to achieve this is to reduce cash outflow. 

Regardless of the reason for refinancing, being proactive is key. Talk to a broker early to understand your available options. If possible and if it makes sense, pull out extra funds to create savings to minimize the reliance on credit cards. With the increased cash flow, it’s key to improve disposable income while increasing savings to manage future financial shock.

This is even more important when you become a homeowner, as there’s a need to save money for regular maintenance, appliance repairs/replacement, roof repairs, etc. 

For Example

House Value: $950,000

Combined Income: $10,000/Month

Account/Bills	Balance	Monthly Payment
Mortgage	$313,000	$1,878
HELOC	$35,000	$209
Property Tax	$5,160	$428
Heat		$315
Total	$348,000	$2,830

Credit Card 1	$7,800	$234
Credit Card 2	$900	$27
Unsecured Line of Credit 1	$5,000	$150
Unsecured Line of Credit 2	$9,500	$285
Personal Loan	$62,000	$862
Total	$85,200	$1,558
Combined	$433,200	$4,388

Now, if we rewrite the debt so it’s all one mortgage, the new mortgage would be $433,200. For this example, we’ll round this up to $435,000 at 4.59%, amortized over 25 years.

Mortgage Payment	$2,419.37
Property Taxes	$428
Heat	$315
Total	$3,162.37

Total cash outflow is $3,162 versus $4,388. This is a monthly cash outflow savings of $1,225/month… a 12.25% savings as a percentage of monthly income. But that’s not all that’s being saved here. We’re also saving thousands of dollars on interest.

Total Credit Card Debt: $8,700 @ 22%	$1,914
Total Unsecured Line of Credit: $14,500 @ (Prime +3%) 7.45%	$1,080.25
Personal Loan Interest	$1,111
Total Interest Savings (Yearly)	$4,105.25

The interest is calculated as if current balances are carried for the year on the credit card and unsecured lines of credit debt. The rationale is that these would have balances close or similar to the existing balance, the rationale being that they would have been paid off if the client could. The loan interest savings are based on the interest rate differential between the loan rate and the mortgage rate, calculated with the remaining amortization on the personal loan. 

In this example, both objectives are achieved with monthly disposable income increasing by $1,225/month, and annual interest savings of approximately $4,105/year all the while maintaining your credit score. 

Another Example

House Value: $800,000

Combined Income: $9,417/Month

Account/Bills	Balance	Monthly Payment
Mortgage	$317,250	$1,719
HELOC	$90,787	$300
Property Tax		$366
Heat		$125
Total		$2,480
Credit Card Balances	$44,000	$1,320
Unsecured LOC	$20,000	$600
Unsecured LOC	$29,000	$570
Unsecured LOC	$19,500	$585
Auto Loan	$44,600	$797
Total	$157,100	$3,872
Combined Total		$6,352

In this example, we would leave the current mortgage as is and place a private, second mortgage at 13% to improve cash flow and interest savings. 

Combined unsecured debt of $157,100 at 13% over 10 years, interest-only payments would be $2,314/month.

The combined payments would be $2,480 + $2,314 = $4,794. A savings of $1,558/month AND a monthly income savings of 16.5%.

In either scenario, we drastically reduce the overall monthly cash outflow, which can either be used towards savings or for making further payments on the mortgage or other debt. If you want to explore what options you have available to reduce the amount of cash heading out of your bank account, don’t hesitate to give me a call. I’d be happy to walk you through your options.