Loan refinancing involves submitting a new application to a lender to modify the terms of an existing loan. Refinancing a loan can make sense in various situations.
Refinance loans typically come with closing costs, but can provide a number of benefits including lower interest rates and payments, changing rate types (e.g. from adjustable to fixed), acquiring cash or taking advantage of specialized loan products and programs.
Lower Interest Rates
When interest rates are low, refinancing can save borrowers money. This is particularly true when mortgage rates drop, but also applies to other types of consumer loans such as auto loans and credit card debt.
Refinancing can lower your monthly payments by lengthening the term of the loan or decreasing the amount you borrow. However, the longer the loan term, the more you’ll pay in interest costs.
Many homeowners refinance to consolidate their debts. This can be a good idea, but it’s important to remember that refinancing does not automatically bring financial prudence. If you have multiple revolving credit accounts, for example, it’s easy to spend more than you earn and wind up in the same spot you were before refinancing.
Refinancing can reduce your overall debt load by consolidating several smaller debts into one larger debt, typically at a lower interest rate than other types of debt. This can make it easier to manage the repayment of large sums of money and can help simplify your monthly bills.
Lower Monthly Payments
Refinancing to repay at a lower interest rate will help you save money on the life of the loan. However, if you choose to refinance with a longer repayment term than what was remaining on your original loan, you will end up paying more in total due to the increased length of the new loan.
Another popular motivation for refinancing is to take advantage of lower market interest rates. Interest rates are influenced by a variety of factors, including national monetary policy, the economic cycle and competition. When these factors cause market rates to drop, many borrowers opt to refinance their existing loans to benefit from the lower rates.
Some borrowers also decide to refinance their existing loans to change the type of loan they have. For example, if you took out an adjustable-rate mortgage (ARM) and now have enough home equity, you can refinance into a fixed-rate mortgage to gain stability and possibly save on interest payments.
It’s important to note that each time you apply for a loan, it counts as a hard inquiry on your credit report. This can lower your score temporarily, although on-time payments on the new loan will likely increase your credit scores over the long run. Therefore, you should only apply for a new loan when the benefits outweigh the credit impact.
Consolidate Your Debts
Debt consolidation is a way to combine multiple debts into one single loan with a lower interest rate. This can make it easier to manage your debt and may help you get out of debt faster. There are a few different ways to do this including taking out a personal debt consolidation loan, opening a new 0% interest balance transfer credit card, or doing a cash-out refinance on your mortgage.
Managing multiple debt payments can be challenging, especially if you have high interest rates on your loans and credit cards. Loan refinancing can reduce your monthly payments, save you money on interest, and give you a clear finish line to pay off your debt.
However, it’s important to remember that debt consolidation doesn’t fix core spending issues that lead to the accumulation of debt. Unless you have a plan to change how you spend for the long term, you’re likely to end up back in debt again. It’s important to understand this before deciding whether debt consolidation is right for you. If you’re considering this option, check out our rate tools to see what kind of terms and rates you could qualify for. You can also speak with a financial professional to learn more about your options. They can help you compare rates, terms and fees to find a solution that’s right for you.
Get Cash Out of Your Home
If you are able to qualify for a cash-out refinance, you can use the money you tap into from your home’s equity to pay off other debt or make home improvements. It can be difficult to build up enough savings for home renovations, and a cash-out refinance can help you accomplish your goals without having to rely on credit cards or personal loans.
You can also use a cash-out refinance to convert an adjustable rate mortgage into a fixed-rate mortgage. This can save you money in the long run because it will help you predict your monthly payments and interest rates.
The most common reason borrowers refinance is to take advantage of lower interest rates, although it is possible to do so for other reasons as well. National monetary policy, the economic cycle and other factors can influence whether or not you should refinance your mortgage.
Refinancing your loans is a great way to improve your financial situation, but it’s important to think through how you will use the funds you free up from the process. If you are not able to make the necessary changes with the amount of money you receive from refinancing, it may be more beneficial to keep your current loan and debt. In this case, you will only reap the benefits of a lower interest rate and monthly payments.