Is Refinancing a Loan a Good Idea?

Nowadays, everyone is struggling with money. The situation isn’t likely to change, with the COVID-19 pandemic making it difficult for many people to pay their bills and debt. But, getting back on track may be easier than you think with the help of a refinance loan.

Refinancing your loan is one of the things you can do to meet your financial goals. However, you should be informed about what refinancing entails and how it works so that you can make informed decisions before committing to a refinancing scheme.

This guide will walk through some common situations when refinancing your mortgage or car might be right for you, then help answer whether or not refinancing is actually beneficial to you.

What is a refinance loan?

A refinance loan can give you a much lower interest rate, affording you enough money to pay off your student loan, credit card bills, home loan, or business expenses.

How does refinancing work?

Imagine you’re in a new job, so money may be tight for some time. There’s money from your previous job—only that it’s not going to cover all your payables. You can’t get a loan because you do not meet the criteria and the bank does not lend to people with a low credit score.

When you refinance a loan, you’re changing who issues your loan. Refinancing doesn’t change the amount of your loan, just the lender and their rates. For example, if you have an automobile loan at 3.5% but find new auto loans available at 2.5%, car refinancing with a new bank would give you a lower rate without changing the principal balance of your loan. Note that this is not an extension or consolidation loan).

Different Ways to Refinance

To some people, refinancing a loan sounds like an attractive idea, while to others it is like a disaster waiting to happen. Following the best practices and use cases can help minimize the risks and make refinancing a loan a good decision instead.

There are various types of refinancing available you can choose from depending on your needs. Here are your top refinancing options.

• Rate-and-term refinancing. Here, you pay off the original loan and replace it with a new loan agreement that has lower interest payments.

• Cash-out refinancing: In this method, the value of the underlying asset that serves as collateral for the loan has increased. In such a case, you are to withdraw the asset’s value or equity in exchange for a larger loan amount and, possibly, a higher interest rate.

Simply put, if an asset has an increased value on paper, you can access that value through a loan rather than sell it. This option raises your total loan amount, provides you with immediate access to cash, and lets you keep ownership of the asset.

• Cash-in refinancing: Here, you get to pay off some portions of your loan with a lower loan-to-value (LTV) ratio or lower loan payments.
  
• Consolidation refinancing: This is when you put all your credit accounts in a single loan with a lower interest rate than the rates you’re currently paying. By using the new low-interest loan to pay off your existing debts, you can significantly reduce the outstanding principal amount while enjoying borrower-friendly fees.

Things to Consider About Refinancing

If you are looking to refinance a loan, there are some important things you need to know. Typically, refinancing your loan will mean you will trade in an existing loan for a new one. The new one may come with more favorable terms or lower interest rates.

However, there’s also a chance that the terms could be less favorable than what you currently have. Perhaps you enjoyed a fixed interest rate before but now it’s variable. It’s also possible to get a shorter loan term than the original term.

When done right, refinancing a loan can let you consolidate your debts, save time and money, and gain financial freedom. Depending on the lender, you might have to pay an origination fee and closing costs, so it’s best to refinance worthwhile projects.

Some common refinancing projects involve paying off a car loan or home improvement loan.  Refinancing is also a smart move if you have expensive, high-interest credit card debt. Here, paying it ASAP should be your priority.

When deciding whether refinancing is worth it, do your research, compare lenders and programs, shop around, and take into consideration interest rates, fees, and installment payments.

Wrapping Up

Today, the lending industry is on the rise—in a positive way. Lending products are tailored for both individuals and businesses, making it simple to get the money you need for any financial commitment.

With hundreds of firms offering different types of loans, refinancing old loans is one of the smart alternatives you have, as many of these come with more favorable terms for borrowers. However, refinancing a loan does not apply to everyone. If you’re thinking about refinancing a loan, think about your financial situation and consult a professional for advice first.