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Refinancing Loans

Making payments on a loan with suboptimal terms can make you feel trapped. Luckily, refinancing is an option that may help you acquire more suitable terms for the loan.

Essentially, refinancing replaces an old loan with a new one with terms that are better for your situation. But it’s not all fanfare and applause—there are tradeoffs associated with refinancing.

What Can Be Refinanced?

While mortgage loans may be most commonly refinanced, you can also refinance auto and personal loans. You can even “refinance” credit card debt by transferring the amount left to pay to another credit provider or even a Home Equity Line of Credit often with better terms to pay off the debt.

Not all lenders will refinance your loan, though. Just like how you had to prove to a lender that you were a good fit for your original loan - say an auto loan, you’ll need to do the same when you refinance. Lenders will consider your income, credit history, and credit score along with other factors.

Benefits and Risks

The benefits of refinancing could include lowering your interest rate or monthly payment, or changing the length or type of your loan. But it’s possible that some benefits will come with a corresponding drawback. Sometimes lowering your monthly payment requires extending your loan, which can mean that you pay more overall. Shortening your term can make it harder to afford your payments if your financial situation changes unexpectedly.

Another major drawback comes from the cost of refinancing. When you refinance a loan, you’re taking out a new loan to pay the original loan off. That means all the fees that went into the original loan may apply again, and if your original loan had a prepayment penalty, you may have to pay that when you refinance. Depending on the type of loan it may be significant.

Some lenders may allow you to roll those costs into your new loan amount and pay it off over time, but that can make the actual amount that you pay the same or more than your previous loan. Before you agree to a refinance, it’s important to make sure that the price of doing so will actually benefit you.

When to Refinance

The best time to refinance depends on multiple factors. If interest rates have dropped since you got your loan or if your credit score has improved significantly, it may be worth trying to lower your interest rate with a refinanced loan. If you’re struggling to make your monthly payments, lowering your payments by getting a longer term, even if it means paying more overall, may help take some of the strain off of your budget. Many people also refinance for extra cash, this is called a cash-out refinance. In the case of mortgage refinancing, you could be trading in equity for more debt.

Finding the Best Deal

To figure out if refinancing will be the right for you, you’ll need to do some calculations. Determine how much your remaining original loan will cost by adding what you have left to pay and the amount you will pay in interest. Next, you’ll want to reach out to potential lenders to get quotes. CSB’s current Consumer Loan Rates and current Mortgage Loan Rates can be found on our website. Be aware that if you apply multiple places and they each run your credit, it may have a negative impact on your credit score. You may want to narrow down your prospects based on interest rates first. Once you’ve found the best deal, compare the difference between the refinanced loan and your current one. Do you end up coming out on top? If so, refinancing may be one of the most powerful moves you can make to help overcome debt.