You may feel paralyzed if your loan has unfavorable terms and you’re stuck having to make big minimum payments. Fortunately, refinancing can help you get loan conditions that are better.
In short, refinancing involves replacing an existing loan with a new one that has terms that are more favorable to your circumstances. But refinancing doesn't come without sacrifices; there are balances involved.
The most common type of refinancing is usually tied to home loans but you can also refinance personal, student, and auto loans. You can even refinance credit card debt by taking out a loan to pay it off or moving the remaining balance to a different credit card with better terms.
However, not all lenders will refinance your debt. When you refinance, you'll need to undertake the same process you had to do to show a lender that you were a suitable fit for your original loan. Lenders will take into account your credit history, credit score, and income.
There are some loans that require more thought. For instance, auto refinancing might be challenging because autos depreciate and lose value quickly. If the automobile is old, has high mileage, or isn't worth enough for the lender to feel like it's a secure investment, they will be less inclined to refinance your auto loan.
Risks and Rewards
Lowering your interest rate or monthly payment, modifying the term or kind of your loan, or any combination of these could be advantages of refinancing. But it's possible that every advantage will also have a matching disadvantage. Sometimes extending your loan is necessary to reduce your monthly payment, which may result in you paying more altogether. If your financial status unexpectedly changes, a shorter term may make it more difficult for you to meet your payments. You might not be eligible for government relief programs if you refinance your federal student loans.
You take out a new loan to pay off the old one when you refinance. This implies that any prepayment penalties from the prior loan, in addition to all the fees and procedures that went into the initial loan, will apply once more. These expenses can rapidly build up to be quite high.
Some lenders will permit you to include those expenses in your new loan amount and pay it off over time, but doing so may result in you paying an amount that is equal to or higher than your prior loan. Make sure that the cost of a refinance will actually work out in your favor before committing to one.
When should I refinance?
The ideal refinancing window relies on a number of variables. It can be worthwhile to try to lower your interest rate with a refinanced loan if interest rates have decreased since you obtained your loan or if your credit score has dramatically increased.
Even though it means paying more overall, getting a longer term can help you cut your payments and relieve some of the pressure on your finances if you're having trouble keeping up with your monthly obligations. A cash-out refinance is another common practice when consumers refinance to obtain additional funds. But be cautious because doing so might require unnecessarily taking on extra debt. If you refinance your mortgage, you can be exchanging equity for additional debt.
Is refinancing a good option for me?
You'll need to perform some calculations to see whether refinancing is the best option for you. By adding the remaining balance and the interest payment, you’ll be able to calculate the total cost of your original loan. You'll then need to put in some effort. Get a quote by contacting potential lenders. Speaking with several lenders should only count as one hard inquiry on your credit report as long as you do this in a brief period of time (often around a month). Multiple queries dispersed across a longer time period might have a major negative influence on your credit score.
When you obtain estimates from prospective lenders, take those figures to your present lender to see if they can match or beat them. Compare the differences between the refinanced loan and your existing loan once you've discovered the best offer. Do you ultimately win on the deal? If so, refinancing could be one of your most effective options for getting out of debt.
See how much you could save in interest with the Hughes Financial Calculator.
