Debt & Refinance Guides

Refinancing debt means taking on a new loan with new contract terms and conditions that effectively replaces the previously existing loan. Refinancing is common with home and auto loans, but is also used by business and consumes who want to refinance other personal loans. Refinancing is typically used to improve your financial position by making debt more manageable.

Basics

Loan refinancing is commonly used by business and consumers to trade in a high interest loan for a lower interest rate when market conditions drive rates lower. Refinancing is often done through the existing creditor or bank, but you can also refinance with another lender that simply pays off your existing loan with the new loan funds. Refinancing offers a few basic benefits, but you must consider potential drawbacks as well.

Benefit: Lower Rates

The most obvious benefit and reason to refinance your mortgage, auto loan or other loan product is to take advantage of lower rates. Market factors often move interest rates lower at some point following your initial loan funding. Lowering your interest rate even a fraction of a percentage on a long-term loan, such as a mortgage, can lower your payments and dramatically lower your total interest paid over time.

Benefit: Lower Monthly Payments

Another main reason someone refinances a loan is to reduce monthly payments. For instance, if you have paid off several years on a 30-year fixed mortgage, you could refinance for another 30 years, and spread out the repayment. This reduces the monthly outlay. Ideally, you would refinance to a lower rate, which is more financially beneficial. Some borrowers do refinance to similar, or even higher rates at times to reduce monthly payments because they are struggling to keep up.

Considerations

Refinancing does not always make financial sense, even if rates are lower. You often pay up-front closing costs to refinance, especially if you are looking at a mortgage refinance. You must decide whether you are going to stay in your home, or hold on to your secured asset, long enough to recoup your closing costs from the interest savings. Some mortgages have prepayment penalties intended to keep you from refinancing too early. Check your loan contract to see if you have one. This might make refinancing a bad move.