Americans use loans of all types to pay for a myriad of everyday and major expenses, including college, homes, cars, vacations and medical bills. However, these can sometimes become unbearable with high interest charges, huge monthly payments and difficult terms. A great solution for making a debt easier to deal with is refinancing. Refinancing any type of loan or mortgage does take some time and money, and you must look into all possibilities before shifting your debt into new terms. In many cases though, you will discover the following four benefits when you refinance a personal, auto, student loan, or mortgage.
Lower the Interest Rate
The biggest reason that most people choose to refinance a loan is to improve their current interest rate. Perhaps rates have fallen since you first took out your mortgage, or your credit score has improved significantly since you took out a personal or student loan. This way you can lock into a better, more reasonable rate that allows you to pay less interest and make larger payments towards the principal balance each month. If you are looking into taking out a new mortgage, first consider how much the closing costs and fees will add up to and weigh the length of time you plan to stay in your current home. Paying a couple thousand in closing costs now may eventually pay for itself in monthly payment savings several years down the road, but may not be worth it if you plan on leaving sooner than that.
Change the Term Length
While lowering the interest rate is a priority, you may want to consider refinancing to change the term length. If you are currently in a 30-year mortgage, you may be able to switch to a 15-year without affecting the monthly payment much. Although you're essentially paying the mortgage balance back in half the terms, you can expect the payment to increase, but the monthly interest rate savings may still make the overall payment an affordable option. This way you can look forward to not being tied down to a mortgage while you're still young enough to enjoy the extra financial cushion.
Switch the Loan Type
If you are currently in a loan with a variable interest rate, it may be time to refinance and opt for a more dependable fixed rate. Variable may look good initially if interest rates are currently low, but payments can escalate quickly with changes in the economy. A fixed rate loan will protect you from major changes to your finances and help you better plan your monthly budget and secure long-term financial goals.
Live More Comfortably
In general, refinancing your loans should help you live more comfortably by saving money and decreasing your stress level significantly. Although the process can take a bit of time, you can always work with a financial advisor who will help you decide if this is the right financial move for you. By lowering your monthly payments to eventually pay off a loan early, you can free up extra money and improve building an emergency fund and increasing retirement contributions.
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