There’s a lot of buzz around refinancing, but you might wonder about what it actually means. Keep reading to find out what you need to know.
When interest rates fall, there can be talk about refinancing to reap those benefits. Yet, some don’t really know what refinancing really means or if it would help their financial situation.
A person can refinance any debt, but the most popular ways are home and car loans.
To put it simply, when you refinance one of your loans, you’re replace your existing loan with a new one that should have better terms and features than your original loan. It doesn’t eliminate the original balance, but if your loan is risky or too expensive, refinancing can help if your credit or situation is currently better.
When you refinance, you’re switching one loan out for another.
How to Refinance
If you decide that you’d like to see if you can get better limits and terms on your loan, there are some steps you want to take to refinance.
First, shop around for lenders and see who has the best loan terms. Don’t settle. Find out which one has the best new loan for you and your situation.
During this time, don’t take on any other debt. You want to make sure your credit is as good as it can be so you get the best loans out there. Research all options when it comes to taking on a new loan and what loan and lender can provide you what you need.
Once you decide on a lender, they’ll buy out your debt. Then, you’ll begin payments on your new loan. In the future, you can pay off this loan or refinance again if there’s better options for you.
The Pros and Cons
There are a lot of different scenarios if you decide this is best for your financial journey. It could help you in the long run in some cases and hurt you in others.
The biggest benefit to refinancing any debt is it can lower your monthly payments. Usually the payment can be lowered if you can score interest rates that are lower than your existing ones. This can happen due to a higher credit score or market conditions. Lower rates will show significant savings over the life of the loan.
Another huge pro to refinance is to shorten your loan term. If you have a 30-year mortgage on your home, you can lower it to 15 years. Your monthly mortgage rate usually goes up, but your interest will go down and your loan will be paid off in 15 years.
You might consider refinancing if you want to consolidate multiple other loans too. When you refinance, you can get a lower interest rate and just one payment a month on your debt. This could help you keep track of what you’re paying and spend less amount of money on the life of your debt.
The last pro to refinance is when you can switch your loan from a variable-rate loan to a fixed rate loan. This means, instead of your interest rate going up or down from month to month, you’ll be set on one interest rate for the life of the loan. It can help you better plan on what you’ll be spending every month and there won’t be any surprises either!
Even though some people can save money in the long run when they refinance, others won’t.
Refinancing can be expensive. You might have to come up with 3-6% of your principal upfront to pay off in refinancing fees. These will take care of the application, appraisal, and inspection fees. Plus you’ll have to take care of any other closing costs, which can cost thousands.
Sometimes you might get stuck paying more interest too. There are times when you can lower your monthly payments and extend your loan, but you end up having more time to pay interest. Those extra months can add up.
Other loans you can refinance actually have useful features that will disappear when you refinance. One example of this would be federal student loans. Some student loans can be forgiven depending on certain situations or if you’re a public servant. Once you go private and refinance these loans, those benefits go away.
Should You Refinance
It all depends on your situation.
If you can save money over the life of your loan or make your life easier by consolidating and saving on multiple loans, then it’s a great option. Follow your heart and brain. Just make sure to do research beforehand to make sure you’re getting the best loan from the best lenders.
On the other hand, if you’re not going to be able to save any money, it’s not worth it. Try improving your credit score or taking control of your debt free journey to try again in the future.
No matter what you decide what’s best for you, understanding what refinancing actually means can help your financial situation.