Refinancing your debt to be debt free
Did you know that interest rates on debt compound on themselves and this reverse savings and investing make is harder and longer to become debt free. So, refinancing your debt makes a whole hell of a lot of sense. To see its benefit, get our Credit Card Comparison Pay Off Calculator here.
Our favorite tips for refinancing your debt
When we had $51,000 of credit card debt, we paid about $10,000 a year in interest payments. That’s $10,000 dollars a year going to banks with no value to us and all the value to banks.
Ten-thousand dollars is a few nice vacations a year. It’s 400 $25 bottles of wine a year or 33 pairs of $300 jeans.
Or, $700/year of positive interest at 7%.
Or, a $9,700 invested at 7% for 10 years.
When we paid off our debt, we essentially gave ourselves a $10,000 raise. WTF would you do if your boss gave you a $10,000 raise?! If you’re like us, you’d do a fancy dinner with good wine and book a vacation to Puerto Vallarta.
What we’re trying to do is show you the value of refinancing your debt.
We mostly used our Debt Lasso Method below to stop paying $10,000/year in interest payments but rather to pay off our debt in two and a half years.
Refinancing your debt with the Debt Lasso
The Debt Lasso wrangles your interest rates down as low as possible, ideally 0%. Negotiating a lower interest rate on existing debt is possible, but you’re more likely to get Trump and Pelosi to skip out onto the White House lawn holding hands than getting a bank to agree to a 0% interest rate – it won’t happen.
That’s why the second and most productive step with the Debt Lasso for credit cards is maximizing 0% interest rate promotions.
So, we first contacted all our credit card companies to lower our interest rates. Some agreed, even if it took some convincing. It helped that our payment histories and credit scores were good. The only thing holding us down was our debt/income ratios.
Next, we took advantage of 0% interest rate credit card promotions with no annual fees – we can currently find eight of these. When we found offers like them, we’d calculate the cost of a balance transfer. This meant reading a lot of fine print and understanding what we read.
Most 0% interest rate credit card promotions last between six and 18 months. We chose the longer terms to keep our net expenses low.
Then, we hustled to pay off as much debt as fast as possible. When one card was paid off, we put more money towards our remaining debt and repeated this until we were debt free.
The fine print of the Debt Lasso
There are two things to keep in mind when using the Debt Lasso to refinance your debt.
The first is to read the fine print. Understand what happens if you miss or are late on a payment, what could cause you to no longer qualify and what your interest rate will be after the promotion ends.
The second concern is that regularly opening and closing loans will cause your credit score to drop. We both kept our credit cards with the longest histories open with $0 balances to minimize this drop in our credit scores.
Refinancing your debt for a car loan
There are many reasons to refinance your car loan. The biggest is if today’s rates are lower than your current rate. Another is if your credit score has improved since you took out your last loan.
Our best advice for refinancing your debt for a car loan is to use a credit union. When we decided to pay off our two car loans, we looked everywhere for better rates and terms and nothing beat credit unions.
The credit unions we talked with were more interested in our personal situation and goals than banks were. Also, the credit unions were open to consolidating our two loans into one.
Download our strategic Credit Card Comparison Pay Off Calculator here to see if the rates you find make sense to refi your car loan.
Refinancing your debt for a mortgage
Refinancing your debt for a mortgage makes sense under certain conditions. People too often refinance mortgage debt and lower their month-to-month payments but wind up paying more because of their extended their term or the number of years they have to pay off their mortgage. Likewise, refinance fees can make refinancing your debt for a mortgage cost-prohibitive.
With rates dropping, only refinance your debt for a mortgage if the refinance fees make sense and you can keep your term between 10 or 15 years.
If you do a cash-out refi to consolidate debt, keep a loan to value on your property below 80%. Without at least 20% equity in your property, you’ll pay Private Mortgage Insurance that will cost 0.05% to 1.00% of your loan. For a $300,000 mortgage, that’s $1,500 to $3,000 more in payments per year.
Regardless of your reason for refinancing your debt, don’t go into debt again. When we first paid off our $51,000, we went through a couple of spells when we got into debt again – not $51,000 – but it took a few tries to stay 100% debt free.
Don’t do that! Especially when refinancing your debt, become debt free and stay debt free.
Also, download our Credit Card Comparison Pay Off Calculator here to see if it makes sense to refi your mortgage.
For more help with your debt, go to:
- Our Super-Fast, 5-Step Plan to Become Debt Free
- 5 Steps to Breaking Bad Financial Habits
- 17 Ways to Find Extra Money without Finding an Extra Job