If you’ve been in the financial world for a while, you might’ve heard the term “refinancing” used before. However, you might not be familiar with what the phrase actually means. Well, MaxCash is here to explain not only what refinancing is, but what it can do for you, as well as how the process works. Keep reading to discover more about refinancing and how it could benefit you.
What is Refinancing?
The term “refinancing” might sound rather fancy, but the concept is actually rather simple. Refinancing begins when you have a loan you’re not satisfied with in some way. It could be that your monthly payments are too high, your interest rate is too steep, or any number of other reasons. Refinancing means looking into other loans for a better deal than the one you may currently have. Once you’ve found a better deal, you can begin the refinancing process.
Refinancing involves applying for another loan and going through the process again, just like you did for the original loan. Except this time you’ll need to complete a different set of paperwork for the refinancing process. Once you’ve obtained that new refinanced loan, you’ll have new, more preferable terms.
Refinancing Benefits and Drawbacks
So now you know what refinancing is, we can talk about some of the benefits and drawbacks of making this kind of decision for your home loan. Of course, the specifics will vary from deal to deal, so you’ll need to be careful regarding the details and costs to make sure you truly are getting a better deal. That said, some of the benefits include:
- Lower Interest Rates – The most common reason for refinancing is to lower the rates on an existing loan and make dealing with it easier. Finding a loan with a lower interest rate can happen from time to time, and using that loan to pay off your prior, higher interest loan can save you tons of money over time. A drop of just a few percent may not seem like much, but over time, the savings will really add up.
- Lower Monthly Costs – Having lower monthly payments may mean having the loan around for longer but refinancing can mean having more money every month. If you’re stretching yourself thin on other payments because of large monthly ones, it might be better to refinance and extend the loans duration to give yourself more time to rebuild funds and regain financial stability.
- Consolidation – Sometimes, multiple loans might be too much to keep track of at once. You have your school loan, auto loan, home loan, and more. Just like any other person, you may be prone to forgetting when things get overwhelming. Refinancing your loan can consolidate all your different loans under one single banner. The cost of this loan will be a bit higher than the individual multiple loans, but it’ll be easier to manage, and may come with a lower interest rate to boot.
However, that’s not to say that everything is all sunshine and rainbows. In fact, there’s several issues that can come up as a result of not considering your decision to refinance properly. When deciding to refinance, make sure you’re fully aware of all the potential angles, lest some of the following could happen to you:
- Processing Payments – When you’re looking to refinance your loan, be aware of any costs that may come as a result of simply signing up for a new loan. On a home loan, just the closing costs can tack on tons of extra charges. Make sure that the differential between your original loan and the new one includes these additional charges to make sure you’re really saving money.
- Increased Overall Cost – If you extended your loans duration to enjoy lower monthly costs, keep in mind that, unless you’re also lowering your interest rate, you’ll probably end up paying more overall once the loan is done. If your problem is monthly spending and not overall cost, this will be good for you. However, if you’re simply just trying to keep costs down, keep an eye on your interest rate to make sure you’re not spending more than you should.
- Removal of Benefits – This issue is going to be specific to the type of loan you’re looking at, but some loans have specific benefits that you might not want to lose by refinancing. Some loans might be more restrictive of what you can spend the funding on, while others might seem like a better deal at first, only to change when the market shifts.
Overall, the refinancing process can be great to those looking to get a better deal on an existing loan, but exercise extreme caution and do plenty of research. Making a mistake in the refinancing process can cost you a boatload of dough, so make sure your refinanced loan is truly worth it when you sign up. Keep posted to MaxCash for other articles aimed towards helping you with your refinancing in the future.