What is Refinancing?
Are you interested in learning more about refinancing or need to refinance an existing loan? If so, we can provide the information you need to consolidate your debt(s) with ease. At its core, the term refinancing means to finance something again. Typically, when someone refinances, he or she is taking out a new loan at a lower interest rate, thereby saving money. When you choose to refinance, you replace your existing debt obligation with another debt obligation under different terms. The terms and conditions of refinancing vary widely depending on a number of factors such as where you live and the current economic landscape. In the United States, many people refinance their primary home mortgage at least once during the duration of the loan. If you choose to replace your debt due to financial hardship, refinancing might be referred to as restructuring of debt.
Reasons to Refinance a Loan
There are many reasons why someone decides to refinance a current loan. If a better interest rate becomes available, you may choose to refinance in order to take advantage of a reduced monthly payment or a reduced term for your loan. You may also refinance in order to consolidate other debts into one loan. For example, if you have several loans and want to merge them into a single loan, refinancing is typically a viable option. If you have a loan with a longer term, refinancing can result in lower monthly payments spread out over a longer period of time.
In addition, if your current loan is a variable-rate loan and you switch to a fixed-rate loan, you can reduce or alter your risk as a borrower, because your costs are set in stone, so to speak. However, keep in mind that some fixed-rate loans have a penalty for paying ahead of schedule, as well as transaction fees for refinancing, so you must do your due diligence to find out if you're really saving anything by refinancing. Some individuals refinance in order to free up cash if they currently have a longer term loan, but as mentioned before, you need to make sure the difference in interest rates and any other associated fees makes it worthwhile to do so.
Reduce Financial Stress
If you currently have multiple debts, refinancing can make the management of debt easier. For instance, if credit card debt, a high-interest debt, is consolidated into your home mortgage, you can pay off the remaining credit card debt at mortgage rates over a longer period of time. Although refinancing usually means you will take longer to pay off your debt, if you are experiencing financial difficulties, you can reduce your monthly payments and have more money to put toward other expenses.
Although most people choose to refinance their mortgage in order to minimize their interest rate and/or reduce the length of their mortgage, refinancing applies to loans both big and small. However, before you make any decisions, you must weigh the pros and cons in order to make sure refinancing is beneficial in the grand scheme of things. At first glance, you might be tempted to consolidate your debts and pay less each month in interest, but the savings in interest must be weighed against the fees associated with refinancing, such as prepayment penalties. In the end, if you do your research and discover that you are actually saving money in the long run, refinancing is most certainly the smart move to make.