People who feel that their current loan/s are putting a heavy burden on their finances often consider refinancing their present debt obligation. Loan refinancing is basically getting a new loan that pays off one or more of your existing loans. Borrowers make this move to obtain a more favorable payment structure, longer loan term, and a lower interest rate.
If you’re thinking of refinancing your outstanding loan/s, you better know what refinancing means and its benefits and risks. Here’s some essential information to guide you.
A Breakdown on the Process of Refinancing
You must choose Refinancing Loans with favorable features and terms than your old loan/s. Keep in mind that the process depends on the lender and the loan type you’re taking. Here’s how refinancing usually unfolds.
You want to ease the burden of your outstanding debt obligation.
You look for a lender with better loan features and terms than your old loan/s.
Once you find a lender that offers a favorable loan, you apply for it.
Once the lender approves your application, your new loan pays off your old debt entirely.
You pay for the new loan until it matures.
In case your old loan comes with a prepayment penalty (a fee charged by the lender if you pay your loan earlier than the maturation date), you should calculate the early termination costs against the savings you’ll get from the refinancing.
Pros of Refinancing
Borrowers opt to refinance their existing debt because of the potential advantages of refinancing.
Debt Consolidation. Refinancing can be a great option if you want to consolidate multiple loans into a single loan. In this way, it won’t be difficult for you to track your payments.
Change the Term of the Loan. Refinancing is best if you want to either extend or shorten the term of your loan. A longer loan term will lower your monthly payments, but the catch is that you’ll pay more due to the extension of the loan term. On the other hand, shortening your loan term will lower your interest rate but with higher monthly payments.
Lower Financing Costs. Borrowers refinance their loans to reduce financing costs. But, of course, it’s a must to go for a loan with a lower interest rate for this purpose. Depending on market conditions and your credit rating, you can qualify for a lower interest rate refinancing loan.
Change the Loan Type. If you think your loan with a variable interest rate is not going in your favor, you can refinance into a new loan with a fixed interest rate. In this way, your monthly payments will be more predictable and manageable to budget.
Cons of Refinancing
There are also disadvantages when it comes to taking out a refinancing loan, especially if you don’t know how to pick the right one for your financial situation.
Transaction Costs. Although the transaction cost may not be the same by state and lender, you have to prepare yourself with fees for the origination, application, appraisal, as well as closing costs, particularly for big loans such as home loans.
Expensive Interests. You may incur higher interest costs on your loan if you lengthen the period of the loan term. So, you must make sure if choosing a longer loan term is favorable on your finances or not.
I hope you’ve learned something from reading the guide above. Choosing to refinance your loan/s can be beneficial if you know how refinancing works. Most borrowers refinance their loan/s to get a more favorable interest rate, different loan terms, and better payment structure. Make sure to know the pros and cons before you consider refinancing.