Refinancing is the process of replacing an existing loan with a new loan that has different terms, often with the goal of obtaining a lower interest rate, reducing monthly payments, or changing the length of the loan.
Typically, refinancing starts with a review of your current loan terms, including the interest rate, monthly payments, and remaining balance. As you consider your current circumstances, decide what you hope to achieve by refinancing. Unsure what you can refinance? The most common types of loan refinancing are student loans, auto loans, and mortgage loans.
After this thought process, it is time to look around for lenders who offer refinancing options that fit your goals and financial situation. Compare interest rates, fees, and terms to find the best deal. Once you’ve found a lender and submitted an application, they will evaluate your creditworthiness and financial situation to determine if you qualify for the new loan.
But when should you consider refinancing in the first place?
When Does Refinancing a Loan Make Sense?
Refinancing a loan can make sense in several situations. The goal of refinancing is to save you money in the long run. This can be done by reducing monthly payments and overall interest costs.
It’s important to carefully consider the costs associated with refinancing and make sure that the new loan aligns with your financial goals and budget. Ultimately, refinancing can be a smart financial move if it helps you save money, pay off debt faster, or achieve other financial goals.
Refinancing a loan can make sense in several situations, including:
Improved Credit Score
If your credit score has improved since you took out your original loan, you may be able to qualify for a lower interest rate on a new loan. A higher credit score can also make you a more attractive borrower to lenders.
Changing Your Rate Type
There is a possibility interest rates have dropped since you took out your original loan. You may be able to save money by refinancing to a lower interest rate. A lower interest rate can result in lower monthly payments and overall interest costs over the life of the loan.
The same principles can be applied if you have a variable-rate loan and want to switch to a fixed-rate loan to lock in a stable interest rate.
Lowering Your Monthly Payments
When you refinance, you may be able to get a lower interest rate on your new loan. This means you’ll pay less in interest charges over the life of the loan, and your monthly payments may be lower.
Additionally, if you refinance and take out a new loan for a smaller amount than your original loan, your monthly payments may be lower.
The term of the loan will affect the monthly payment. There is the possibility that the new loan term is shorter which causes the payment to be higher even if the rate if lower.
Payoff Your Loan Faster
If you want to pay off your loan faster or extend the loan term to reduce your monthly payments, refinancing may be a good option. For example, if you currently have a 30-year mortgage but want to pay it off in 15 years, you could refinance to a 15-year mortgage.
How to Refinance a Mortgage
Refinancing a mortgage involves replacing your existing mortgage with a new one, typically with better terms which may include a lower interest rate. The process of refinancing a mortgage follows the same rules for refinancing in general.
Credit Score Check
First things first, check your credit score. Your credit score is an important factor that lenders will consider when you apply for a new mortgage. Before you start the refinancing process, it’s a good idea to check your credit score and make sure it’s in good shape (or see if it has gone up).
Review Current Loan
You should thoroughly evaluate your current mortgage. Make sure to review the terms of your mortgage, including the interest rate, monthly payment, and remaining balance. This will help you determine if refinancing makes sense for you.
After evaluating, look around for lenders! Research different lenders and compare their rates and fees. You can also work with a mortgage broker who can help you find the best deal. Oftentimes, your local bank or credit union can help out as well.
Application & Loan Closing
Once you’ve chosen a lender, you’ll need to fill out an application and provide documentation such as pay stubs, tax returns, and bank statements. Your lender will likely require an appraisal of your home to determine its current value.
If your application is approved, you’ll need to sign the new mortgage paperwork and pay any closing costs. The new lender will use the proceeds of the new mortgage to pay off your old mortgage.
It’s important to carefully evaluate the costs and benefits of refinancing to determine if it makes sense for your financial situation. Refinancing can be a good option if you can lower your interest rate or monthly payments, but it’s not always the best choice for everyone. Be sure to weigh the pros and cons before making a decision. Contact Marine Credit Union today if you are looking for refinancing help or resources!