Refinancing Your Loans
Making payments on a loan with sub-optimal terms can make you feel trapped. Luckily, refinancing can help you find more suitable terms for the loan.
Essentially, refinancing replaces an old loan with a new one with terms that are better for your situation.
While mortgage loans may be most commonly refinanced, you can also refinance auto, personal, or student loans. You can even “refinance” credit card debt by transferring the amount left to pay to another credit provider with better terms or taking out a loan to pay off the debt.
Not all lenders will refinance your loan, though. Just like how you had to convince a lender that you were a good fit for your original loan, you’ll need to do the same when you refinance. Lenders will consider your income, credit history, and credit score.
Benefits vs. Risks
The benefits of refinancing could include:
- Lowering your interest rate, or
- Lowering your monthly payment, or
- Changing the length or type of your loan
But, depending on your financial situation and type of loan, you may need to consider the potential drawbacks. Sometimes lowering your monthly payment requires extending your loan, which can mean that you pay more overall. Shortening your term can make it harder to afford your payments if your financial situation changes unexpectedly. If you refinance federal student loans, you could lose access to debt forgiveness or government relief programs.
The benefits of refinancing could include lowering your interest rate or monthly payment, or changing the length or type of loan.
There are some costs associated with refinancing. When you refinance a loan, you’re taking out a new loan to pay the other off. That means all the fees and processes that went into the original loan will apply again, as well as any possible prepayment penalties on the previous loan. Some lenders will allow you to roll those costs into your new loan amount and pay it off over time. You may end up paying more in the long run on your loan, but it can also make monthly payments much more manageable for you.
The best time to refinance depends on multiple factors:
- If interest rates have dropped since you got your loan
- If your credit score has improved significantly, it may be worth trying to lower your interest rate with a refinanced loan.
- If you’re struggling to make your monthly payments, lowering your payments by getting a longer term, even if it means paying more overall, can help take some of the strain off of your budget.
- Many people also refinance for extra cash, this is called a cash-out refinance.
- But be wary of this, it could mean taking on more debt needlessly.
- In the case of mortgage refinancing, you could be in trading equity for more debt.
To figure out if refinancing will be the right move for you, you’ll need to do some calculations. Determine how much your original loan will cost by adding what you have left to pay and the amount you will pay in interest. Compare the difference between the refinanced loan and your current one. Do you end up coming out on top? If so, refinancing may be one of the most powerful moves you can make to help overcome debt.
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