Dear Dave,
My husband and I are on Baby Step 2, and we’ve paid off about $30,000 in consumer debt since March. We were wondering if we should refinance our mortgage. Our current rate is 4.875 percent, with 28 years remaining on the loan. We found a 15-year refinance at 2.5 percent, which would raise our monthly payments about $200, but we can handle that. We have $150,000 in equity in our home and about $207,000 left on the loan. What do you think we should do?
Raye
Dear Raye,
You two have done a great job this year! I’m so proud of what you’ve accomplished and that you’re looking to the future.
Baby Step 2 wouldn’t be affected, except that your monthly
mortgage payment will go up a little. I wouldn’t pay the refinance costs out of pocket, though. I’d roll them into the loan. You’d be saving more than 2 percent by locking in this crazy-low interest rate, and you’re knocking the whole thing down to a 15-year loan. I love all that. It’s definitely worth the extra $200 a month to make it happen.
Think about it this way. You’re going to be saving more than $4,000 a year with the interest rate reduction. You’re not going to see it in
cash flow because of the $200 increase in monthly payments, but over the scope of the loan, you’re going to be charged between $4,000 and $4,500
less per year for interest. All that money is going toward paying back the closing costs and reducing the principal built into the move from 28 years to 15 years.
Yes, you should do this!
—Dave
Which Comes First?
Dear Dave,I just saved up my $1,000 beginner emergency fund, and I’m looking at paying off my car and credit card debt—a total of $3,400—by the end of January. Before I started your plan, I took out a $7,500 student loan to pay for my fall and spring semesters. I still have a year of school left, which will cost about $10,000. Should I save up the money for my final year before attacking my student loan debt, so I don’t have to take out another one, or go ahead and begin paying it off?
Emma
Dear Emma,
Well, it doesn’t make much sense to pay off the current
student loan, then turn around and take out another one. Your first goal—after you get the credit cards and car paid off—should be saving cash to finish school. Once you’ve done that, start paying off the student loan.
Long story short, you’ve got to stop borrowing money. The idea of saving up to pay for things should be the default setting in your brain, Emma. Otherwise, you’re going to spend the rest of your life with
car payments and other debt hanging around your neck. That’s not being responsible with your money, and it will keep you from saving for stuff that matters
and becoming wealthy.
Stop. Borrowing. Money. I hope I haven’t been unclear.
—Dave
Dave Ramsey is CEO of Ramsey Solutions, host of The Dave Ramsey Show, and a best-selling author, including “The Total Money Makeover.” Follow Dave at DaveRamsey.com and on Twitter @DaveRamsey.
