When you refinance a loan, you take out a loan to pay for another loan. Ideally the new loan has better terms, whether that’s lower interest rate, lower monthly payments, or a shorter loan period. But sometimes, those “better” terms can end up not being so great after all. It’s tempting to be lured in by trending lower interest rates. And many times, refinancing can work in your favor. But there are some considerations to be mindful of before you bite the bullet.
The Benefits of Refinancing
For most, refinancing a loan to gain better terms, usually a lower interest rate, is a great idea. Refinancing comes with a lot of advantages, and the top benefit is certainly lower monthly payments. Keep in mind, you’ll only get lower monthly payments if you refinance to a loan with a lower interest rate and the length of the new loan isn’t drastically shorter. Of course, lower interest rates will usually save you more money in the long run, even if you end up paying the same each month because of the length of the loan.
Another advantage to refinancing is the ability to pay off debt on your terms. Perhaps you’re ready to pay off a loan over a shorter period of time, or maybe you want to lower your monthly payments by extending the life of the loan. Situations change, and refinancing gives you the flexibility to adjust your loan to match those changes.
Refinancing is also a great way to consolidate debt. By using a lump sum to pay off existing high interest debt. Another advantage to consolidation is that it’s much easier to keep track of what you owe when it’s bundled into one monthly payment.
The Disadvantages of Refinancing
But refinancing can also come with some disadvantages. And it’s important to consider these before you make a decision to get into a new loan. The first disadvantage is that many refinancing options come with a price tag. Some refinancing loans have big fees attached. You’ll need to make sure the fees aren’t so high that refinancing isn’t worth it.
It can also be more expensive to refinance. For example, if you choose to refinance because you want to extend the life of your loan, you might end up paying more over the life of the loan because of interest. This is especially true if you’ve been paying your original loan for a while and the interest was front-loaded. Make sure to do the math first so you don’t end up paying more than you expected.
When to Refinance
So now that you’ve got a good idea of the basic advantages and disadvantages of refinancing, you might be wondering how to know when it’s time to refinance. Whether you’re considering refinancing a mortgage, an auto loan, or some other type of loan, timing is key.
Don’t just look at current interest rates to make sure you’re getting a good deal. Consider your financial situation too. Do you have more income, better job history, and a better credit score than you did when you first financed your loan? If so, then you’ll likely qualify for better terms. But, if you’ve had a change in jobs, your credit score has dropped, or your income has fallen, then it might be best to wait it out.
Another good reason to jump the gun and refinance is if you’re ready to pay off a loan quickly. If you are in a better financial situation and qualify for a shorter loan life, you can get rid of debt faster by making higher monthly payments on a refinanced loan.
But keep in mind, for refinancing options on auto loans, it can be difficult to qualify if you owe a lot more than the value of the car. So even if you’re in a better financial situation, if you originally financed the loan under a less-than-ideal situation and ended up with a really high interest rate, many institutions won’t refinance. In that case, it might be better to take out a personal loan to pay the payoff amount.
We always recommend doing the math and making sure you understand all the fees and terms before refinancing, even when the interest rates are tempting. And if you’re not sure if refinancing is right for you, reach out to us. For mortgage refinancing, call our 24/7 mortgage hotline at 904.371.8150. For auto loan refinancing reach out to us at 904.354.8537, option 3.