Replacing Your Current Loan With a New One — Navigating Refinance Loans
There are numerous factors that determine what type of mortgage makes the best sense for you. When it comes to home loans, there is no one-size fits all. There are many factors to consider and questions to ask yourself such as ‘how will this loan affect my finances?’ and ‘do I want a loan with a changing monthly payment?’ If you have an existing home loan, your situation may have changed. At My Home Loans, we work with individuals such as yourself who are navigating your current loan with hopes of finding a better one. A refinance loan could be your solution to improving the terms of your current loan.
What is Refinancing?
Refinancing involves replacing your current loan with a new one. The new loan will cover your current debt and should help you improve your financial situation. Ultimately, you want to refinance when your existing loan could be replaced with a better one.
The process of refinancing typically goes as follows:
- You decide you’re unhappy with your current loan and want a way to improve the situation.
- You may seek a loan that’s better for you and apply for it.
- If approved, your new loan will pay off your existing debt completely.
- You will begin making payments on the new loan until it is paid off.
Benefits and Disadvantages Associated With Refinancing
Benefits associated with refinancing include:
- Saving money through interest. Interest can make a difference in the long term. You ultimately want to get a loan with a lower interest than your existing one.
- Lowering monthly payments. If you’re struggling to afford your current monthly payment on your loan, it only makes sense to get a loan that will allow you to have a lower monthly payment. This is often one of the biggest incentives to people whose financial situation has changed since the first loan they took out.
- Shortening loan terms. As opposed to extending repayment with lower monthly payments, you can also decide to shorten the terms of the loan. If your current loan is set at 30 years, you can refinance it and make it a 15-year home loan.
- Consolidating debts. Another benefit of refinancing is the ability to consolidate debts. If for example, you have multiple loans, you can combine them into one. For many people, this is an easier way to handle their debt because it requires a single monthly payment.
- Changing loan types. Perhaps you don’t lower your interest rate or have a lower monthly payment, you still have the option of changing your loan for various reasons such as one with a fixed rate. The benefit of this is avoiding fluctuating rates.
- Paying off a loan. If you have a loan that’s due on a specific date but do not have the funds available to pay it off on schedule, you can refinance the loan into a new loan.
Disadvantages of refinancing loans to consider:
- Higher transaction costs. At times refinancing can be expensive. For example, you may have higher closing costs.
- Higher interest rates. Another item to consider is if you extend your loan with a much lower monthly payment, you may see higher interest rates as a result.
- Lost benefits. If your current loan has benefits that you enjoy, such as flexible monthly payments, you may lose these when you refinance. It is always best to determine which route is ideal for your situation.
The Bottom Line — Should You Refinance?
There is no right or wrong answer when it comes to refinancing. Every situation is unique and can see benefits or disadvantages. Many people will avoid refinancing while others have benefited from it during tough financial situations. One simple method to consider whether you should take out a refinance loan is if it will favor your current circumstance and if it will help you prevent worse damage. A rule of thumb in the industry is if your current interest rate can be reduced by 0.75% to 1% or even higher, it may make sense to refinance. Additionally, you should calculate your monthly savings and determine if this will improve your monthly expenses.
Things to ask yourself:
- Will I save enough money?
- Does a lower payment justify a higher interest rate?
- Will I reduce the risks associated with my current loan?
- Will consolidating my debt help me get out of debt sooner?
Learn More About Refinance Loans Today
If you’re currently unhappy with the terms of your loan, you should consider refinancing your loans. There are numerous benefits associated with refinancing that we recommend exploring further. Connect with us today to learn more. We can help answer your questions and provide enough knowledge to make a reasonable decision through a free consultation. Please, give us a call today to schedule an appointment.