Refinancing: How it works, reasons to refinance, and the benefits
You’re probably familiar with the term “refinance” but how much do you know about how it works, and why you should even be interested in the topic? Whether you’re new to the concept of refinancing, or are interested in learning more about how it works and the benefits, your credit union is here to help fill in the gaps.
How Refinancing Works
Refinancing can be used with a variety of loans but is most commonly referenced when referring to mortgage and auto loans. When you apply for refinancing, a lender will re-evaluate your credit score and the status of your current loan. If the lender determines you are eligible for new, more favorable loan terms, they will present a new loan agreement in which your current/previous loan is paid off and a new loan is created.
Reasons to Refinance and Benefits
- Savings on interest: Refinancing can allow you to take advantage of a lower interest rate which can save you money on the total cost of your car or home. You may be eligible for a lower interest rate, if your credit score has improved since you originally received financing or if the federal interest rates have dropped.
- Smaller monthly payments: If your current loan payment is higher than you’d like, refinancing can enable you to lengthen your loan terms and consequently lower your monthly payments. It’s important to note that lengthening your loan term can result in paying more over time in interest.
- Shorten loan terms: For some folks, refinancing is not about lowering monthly payments but rather it focuses on getting the loan paid off faster. If your current loan does not allow you to make extra payments without a penalty, refinancing can allow you to shorten your loan term and pay off your vehicle or home more quickly.