Refinancing can be a great way to save money and pay off debts. It is also one of the best ways to build equity in your home. If you struggle with outstanding credit card debt or have other loans, refinancing might be worth considering.
You can also use it as an opportunity to consolidate all of your payments into one easy monthly payment.
What is Refinancing?
Refinancing in essence means replacing your current loan with a new one at a lower interest rate. It allows you to pay lower monthly payments, pay off the mortgage earlier, and save on interest.
The new loan has better features or terms, improving your finances and minimizing the effect on credit score.
Why is Refinancing a Better Option?
There are multiple reasons for you to consider refinancing. It comes with many benefits, like lowering your interest rate and reducing the payback period. Suppose you repay five years of installments of a 30-year loan and refinance from a different lender for 20 years. It helps you repay your overall debt five years early, saving massively on interest rates.
Another reason is to embrace the peace of mind. There’s a possibility of getting refinancing at a fixed rate, which can make your life less stressful as the principal amount and interest remain the same while reducing the risk.
Refinancing also allows cashing out your equity. You can use this amount for home improvement, investing, paying for tuition, or merging debt.
There are some loans like balloon loans that require a lump sum repayment on a specified date. However, you can also refinance this type of loan in case of not having the required money. This way, you will receive more time to pay off the debt.
You can also use refinancing for renaming the borrower of the loan. While refinancing, you can change the name of the original borrower who took the loan.
Different Types of Refinancing Loans
Here are the three basic types of refinancing loans:
Rate and Term Refinance Loan
This type of refinancing allows you to change the interest rate, terms, or both without making any changes to the principal. It will save your interest rate on the monthly payment, and you may switch from a variable-rate to a fixed rate.
Cash-out Refinance Loan
As mentioned earlier, a cash-out refinance loan helps you in cashing out a portion of your home’s equity, which can be spent on various activities.
Cash in Refinance Loan
It is a different type of refinancing than cash out. It is appropriate only in situations when you want to get rid of private mortgage insurance, qualify for lower interest, or keep the mortgage amount lower than the limit.
How to Qualify for a Refinancing Loan?
The criteria and obligations for a refinance loan are the same as obtaining a traditional mortgage. Lenders consider your credit history, credit score, payment history on existing loans, income and employment history, your equity in the home, the current value of your home, and other necessary obligations.
Once you meet the standards of the lender and match the requirement, you receive an offer depending on the risk you pose to the lender.
Similarly, refinancing is also a motivating force. People utilize this opportunity to pay off smaller loans first, irrespective of interest rate. It keeps them moving forward and repaying the loans without delaying or missing the repayment deadline. It is because once you see the results and loan paying off, it encourages you more.
Why You Should Consider Refinancing Private Student Loans
Federal student loans have benefits that private student loans are not afforded. Millions of federal student loan borrowers enjoy a break from their payments under the CARES Act. During the forbearance period, they are not accruing interest on their federal loans.
However, private student loans are not given the same benefits under the CARES Act and are not covered by the legislation’s umbrella. If you owe money on your private student loans, now is a good time to review your repayment options.
If you can lower the rate on your student loans, you could save money. It could also mean less stress on your budget. If you want to understand how much student loan refinancing can save you, there are several online student loan refinance calculators that can give you a good idea of what rates you can qualify for.
Weigh the Pros and Cons
Refinancing your student loan is not always the best option. Weigh the pros and cons of a refinance before you make a decision. Here is a closer look at the benefits of refinancing:
The interest rates on student loans have been going down since the Federal Reserve slashed the fund’s rate to zero. If you can lock in lower rates, you’ll be able to refinance private student loans.
If you want to switch from variable interest rates to fixed interest rates or vice versa, you might want to consider refinancing private student loans. Rates for student loans have never been lower, and you can easily compare them at sites like Credible.
If you can secure a lower interest rate, more of your monthly payment goes toward the college cost rather than paying high fees to the lender.
You can free up money in your budget by paying off private student loans more quickly. As of now, Federal student loans are covered through Sept. 30, 2021. Refinancing private student loans won’t cause you to lose any of the benefits since they don’t apply to private student loan debt.
On the flip side, refinancing federal student loans with private servicers is not a good idea.
When to Refinance Your Mortgage
It’s important to understand when it makes sense to refinance your mortgage and when it doesn’t. When you refinance, you are in essence paying off an existing loan and taking out a new one.
Some of the reasons why homeowners refinance are to get a lower interest rate, shorten the term of their mortgage, finance a large purchase, or consolidate debt. Ultimately, refinancing your mortgage can lower your monthly payment which can help you save money. If you want to lower your monthly payment now, this trade-off of adding additional years to your total loan may be worth it.
Keep in mind, there are additional fees associated with refinancing. If you don’t do the math, you won’t know how much refinancing will save or cost you over the long run. A refinance can reduce your mortgage payment, shorten the term of your loan, and help you build equity more quickly.
While refinancing can help you bring debt under control, you need to ask yourself two questions:
Do you want to stay in the house for a long time?
What amount of money will I save?
If you’re thinking of refinancing your home, the first thing you should do is figure out if it will actually save you money.