Refinancing is when an individual takes out a new loan or line of credit to pay off an existing one. The goal of refinancing is to find a more affordable and manageable loan. In some cases, when refinancing, your current lender may be able to provide that option. However, you can always seek out a new loan provider.
Potential Benefits of Refinancing
When refinancing is done right, you can expect a few qualities of the new loan:
- Lower Interest Rates: this is one of the main reasons people choose to refinance their existing debt.
- More Manageable Repayment Terms: another benefit that could come with the process, having more time to repay at a lower monthly payment.
- Lowering the Overall Costs: interest rates, loan types, and policies of a loan provider all determine the overall cost. When refinancing, you may be able to lower the cost of borrowing funds.
Will Refinancing Mean a Lower Monthly Payment?
When you think about refinancing and manageability, you may also be thinking about a lower monthly payment. However, a lower payment each month may not be the best route depending on your financial goals. Those looking to refinance to repay their debt quickly need to pay attention to how much interest is being paid.
And so, instead of focusing on the actual monthly payment amount, it may be just as helpful to understand how much interest you are paying versus the principal amount. For example, with a new loan, you may find yourself with higher monthly payments but very low interest, which will mean paying off your debt faster.
On the other hand, a lower monthly payment, regardless of interest, may be the priority for those who are having trouble making their existing loan payments. And so, although refinancing can mean a lower monthly payment, it doesn’t have to, depending on your financial goals.
How Much of a Loan Can I Refinance?
Whether you can refinance the amount will depend on your debt type, your credit score, and your income. For example, switching from one mortgage provider to another may go smoothly, however switching from that to a personal loan may not be as smooth.
Technically there isn’t a general rule on how much a person can refinance; it depends on approval with a new loan. This is why your credit score and income will play a significant role in whether you qualify for refinancing. Keep in mind that there are state laws that limit funding amounts for a few types of loans.
How Does My Credit Score/Credit History Play a Role in Refinancing?
Your credit score and credit history will have a relatively significant impact on whether it will be worthwhile to pursue the refinancing process. Generally, the better your credit score, the more beneficial the process will be.
Those who have good credit will get better interest rates and repayment terms when compared to another person refinancing the same amount but has poor credit. Income and your debt to credit ratio will be additional factors when determining what kind of loan terms you may get.
And so, if you have less than good credit, refinancing may not be the best option for you.
Does My New Loan Have To Be the Same Type as My Previous One?
When exploring your new loan options, you may be wondering about the types of loans that can be used to refinance a loan. In general, regardless of what loan you have, several loan types can be used to pay off an existing form of loan or line of credit.
For some situations switching loan types may make sense. Someone starting a business may take a business loan not only to create their business but also to pay off debt.
Credit Card Balance Transfers
One type of refinancing that is popular is balance transfers. Many credit cards offer an introductory 0% APR for a balance transfer. This could be a massive benefit for those who can get approved and the specific terms. When choosing a balance transfer card, ideally, you want to find one with no annual fee or balance transfer fee in addition to the zero interest rate.
These work best for those who have excellent credit and have high-interest debt. When done right, balance transfers could mean huge savings and a quicker way to debt relief.
Can I Refinance More Than Once?
Refinancing a loan more than once is possible, and just like the previous refinance process, your goals of a more affordable and manageable loan should be kept in mind.
The Bottom Line with Refinancing
Refinancing can be a good option for those who have fair to good credit and are looking to lower their interest rates while adding more manageability to their monthly payments. However, for those who don’t have the best credit history, refinancing may not work well.
The goal of refinancing should be primarily focused on getting better rates and a repayment plan that aligns with your financial goals.