When Is a Good Time to Refinance My Loan?
What Is Refinancing?
Technically put, refinancing is the process of taking out a new loan to replace an old loan, usually to gain more favorable loan terms. The process is similar to when you first took out the loan; however, it is typically more streamlined than when you purchased the home.
Why Do People Refinance?
People refinance for many different reasons, four big ones being:
- Interest rates have gone down and they want to take advantage of the lower rate reducing the overall cost of their loan.
- Their credit score has improved, giving access to more suitable or cheaper financing.
- They want to reduce their monthly payment by extending the life of their loan. If they have 20 years left on a loan, they can refinance into a 30-year loan to stretch the payments out by 10 more years, reducing the monthly payment. Or they might want to consolidate their debt through a cash-out refinance in order to lower their overall monthly debt payments.
- They want to renegotiate the terms and conditions of their loan. Sometimes individuals end up in loans with less-than-favorable features (such as a balloon payment, interest only, etc.).
When you refinance, you have the opportunity to do each of the above in order to put you in a stronger financial position.
Should I Refinance?
The answer to this depends on your financial position. If refinancing offers you a clear benefit, then it may be something to consider. Some good indicators that it may be a good time are:
- Interest rates are lower than when you initially took out the loan.
- You've had your loan for a while and you would benefit from a lower monthly payment.
- Your credit has vastly improved since you took out the loan.
- Your current loan is an ARM and you want a fixed rate.
- Your loan has a balloon feature and is near the term's end.
Understanding what type of loan you have and the rates on your current loan are very important. Many people end up in financial ruts because they didn't understand the terms of their loan or they don't know whether their interest rate was high or low. It’s important that you trust the Loan Originator you work with and that you yourself have done the due diligence on the loan process.
Do you know your current interest rate?
What Happens When I Refinance?
When you refinance a loan, you are essentially paying off an old loan by taking out a new loan and assuming the terms of the new loan. When you're refinancing, you are free to shop around; you don’t have to refinance with your current lender. Note that if your servicer changes, you will make your payments through your new servicer, not the old.
There are fees associated with refinancing, however, usually these fees can be rolled into the loan eliminating most out-of-pocket costs.
Refinancing is a great tool to help individuals save money and achieve their unique financial goals. Many people take out their loan, make their payments, and forget about it. Understanding your refinancing options, current rate, and terms will help you decide if you are currently in the best position for you and whether refinancing is something you should consider.
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This article is accurate and true to the best of the author’s knowledge. Content is for informational or entertainment purposes only and does not substitute for personal counsel or professional advice in business, financial, legal, or technical matters.
© 2019 Nate Robbins