When Is a Good Time to Refinance My Loan?
What is Refinancing and Why Do People Do It?
Refinancing is taking out a new loan with new terms to replace an old loan. You must go through a process similar to the one you went through when you took out the old loan, though it may be more streamlined.
Why Do People Refinance?
People refinance for many different reasons, four big ones being:
1. Interest rates have gone down and they want to take advantage of the lower rate
2. Their credit score has improved, therefore they will be able to receive cheaper financing
3. They want to reduce their monthly payment by extending the life of their loan
4. They want to renegotiate the terms and conditions of their loan
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?
This is really up to you and your unique financial position to determine if refinancing is the right thing for you. However, some good indicators that it may be a good time are:
1. Interest rates are lower than when you initially took out the loan
2. You've had your loan for a while and you want to extend the loan to reduce the monthly payments
3. Your credit has vastly improved since you took out the loan
4. Your current loan is an ARM and you want a fixed rate
5. 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.
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 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. Refinancing will typically cost you a little money up front in fees so be prepared to have money to give to the lender if you choose to refinance.
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 and current terms will help you decide if you currently have a strong rate and whether refinancing is something you should consider. If you have taken a loan out recently, rates have been so low that you most likely got a great Interest rate. However, understanding your finances and options is always important.
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