To refinance a loan means to borrow money to replace your current debt with more favorable terms. These more favorable terms include getting lower interest rates, reducing payment amount as well as changing the repayment length. This option is best for debtors who are having a hard time paying off their loans. It is important to know that after loan refinancing, the total amount you have paid for your debt will increase. This is so because you are paying interest for a longer period of time. The higher interests come especially with products like mortgages and car loans. Sometimes, the risk is not worth it.
Borrowers refinance their loans to get a cheaper loan. The refinance can give a lower interest rate and help the borrower to save a few hundred dollars monthly especially with mortgages. For instance, let’s say you took a 30-year mortgage loan in 2008 with an interest rate of 6.5%. Today, the most qualified borrowers get the same loan with a 3.5% interest rate. Refinancing this type of loan will be ideal as you can pay less interest and save more than 2% of the interest monthly. What debts can you refinance? Let’s consider some of them below.
You can refinance your student loan to consolidate many loans into one payment. Many college graduates with lots of debt from different companies refinance their loans. They do so to pay monthly to only one company and as well to service just one debt instead of paying different companies weekly.
Furthermore, you can get a personal loan to refinance your credit card debts. Having outstanding credit card balances are risky as they accumulate a lot of interests quickly. Credit card interest rates are higher than personal loan rates. You can use a personal loan to clear your credit card debts and gradually pay off your personal loan.
Do you want to shorten your term length from 30 to 15-year plan? Are you interested in reducing your monthly repayments? If your answer to the questions above is yes, then, you can refinance your mortgage. Homeowners with enough cash to make bigger payments monthly can get a shorter term to pay faster and save the money they pay on interests. Even FHA borrowers who have reached 20% equity can refinance into a conventional mortgage to stop paying mortgage insurance.
Moreover, you can refinance your auto loan to reduce your monthly payments. Instead of defaulting on your debt, you can restructure your loan agreement. This will help you to avoid spoiling your credit. But note that banks have some requirements and restrictions for refinancing; you must meet all the requirements before it is done. However, if you have serious financial issues, meet your loan servicer to give you financial advice.
Small Business Loans
Did you start your small business with a loan? You can refinance this debt to improve your finances. There is also a government-backed SBA 504 loan, they are used for buying real estate and equipment. You can use them to refinance your real estate loans. This can give you a lower interest on a monthly basis.
How to refinance a loan
- First, start by carefully reviewing your current loan agreement to know how much you are paying.
- Secondly, check if there is a prepayment penalty on your current loan.
- Thirdly, review the value of your current loan.
- Do comparisons between some lenders to find a better option that can help you save some money.
- Also, choose the lender with the best option for you.