When you refinance a loan you negotiate new terms on the loan. Generally this means that you take out a new loan to pay off the old loan. There are many reasons for refinancing a loan. You can lower your payments, lower your interest rate, and get better terms for the loan.
Refinancing a loan can be a positive thing, but you need to be sure that the benefits outweigh the costs. You will be charged a fee to close the loan, and you should be able to save equivalent to that amount within two or three years if it is a mortgage or much sooner if it is a consumer loan. You can calculate the different costs in interest and the amount of your payment.
If you choose to refinance, be careful if you lower your payment. This usually means that you extend the life of the loan. If you do this, you may end up paying more in interest even if you have a lower interest rate. The ideal situation would be to keep the term of your loan the same length or the payment the same amount. This will help you to save money and to payoff the loan much quicker.
If you are refinancing because you can no longer meet the monthly commitment of the loan, consider the other options that are available to you. If you are refinancing your home or your car, would you be better off if you sold them, and purchased items that you can afford? If the reasons that you are having trouble making payments are because of a sudden job loss or change in your financial situation is it a permanent change or a temporary one.
If you are refinancing to get lower rates, and to save yourself money be sure to carefully read the terms of your new loan before you sign the papers. You can shop for a refinance loan just as you would for an original loan. Generally credit unions offer better rates. Additionally check to see if you can get a reduced rate if the money is debited from your account. This can often decrease your interest rate by a quarter of a percentage point.
The decision to refinance should be one that you take seriously. Be careful of falling into the trap of refinancing your home, and cashing out your equity ever few years. This is detrimental to building wealth. It also continues to put your home at risk, as you take out more money on it. Refinance when the terms are advantageous to you. It does not make sense to refinance for a higher interest rate than your original loan.
