Refinancing a loan simply refers to taking a new one and using it to replace the existing one. People refinance due to a number of reasons. Sometimes it maybe because they want to reduce the loan term as well as the interest rates. These are just two among the numerous reasons for refinancing. Some are also just based on misconception. The fact remains that refinancing can be good or bad depending on the motivation behind it. Again the conditions and costs of a refinance may not be that much different from those of taking the initial loan.
Below are reasons why you should refinance –
When the goal is to secure a low interest rate
If by refinancing, you are going to reduce your interest rate then go ahead. For example if the existing loan has an interest rate of 5%, then a good refinance will be anything under 5%. Such a reduction will not doubt ease your loan burden and also help you save money in the long run.
If you intend to shorten your loan term
The best time to do this is when interest rates have fallen. This is because at such times it is easier to shorten your loan term by refinancing it with another loan. Note that the monthly payments may not differ that much but the repayment period may as well go down by half.
When there is need to change from an adjustable rate mortgage to a fixed rate mortgage
A fixed rate mortgage is far much better than an adjustable one. An adjustable mortgage rate may seem lucrative because it sets off with low interest rates. However, as time goes by, the interest rates ends up increasing . As such if your loan is on an adjustable rate, then refinancing to get a fixed rate mortgage may be very ideal.
When your credit rating is good enough
Refinancing just like taking an original loan also has certain conditions that need to be met. One of them includes a check of your credit score. If you have defaulted on your loan, it is going to affect your credit rating. On the same note, no lender would want to lend money to someone who has shown a tendency of not meeting loan obligations. If your goal was to reduce the interest rates, then a high credit score would be your best bet. If you have a low credit score, you might end up with an interest rate much higher than that of your existing loan. In such a case, a refinance would not be a sound financial decision. Instead focus on updating your payments and improving your credit score first.
If you have a considerable home equity that you want to tap into
As a home owner you can qualify for another loan if you have an equity in the home. On the other hand, if you are under water and the value of your home is less than the mortgage you already have, refinancing will not be an option for you. Having a high home equity gives you the advantage when refinancing.
As financial experts put it, a refinance has no formula there is no one situation that fits all. Depending on your situation, it may suit you and vice versa. It can help you save money, and even consolidate your debt. It is important that you carefully analyze your financial situation to find out if it suits you or not.