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Refinancing can be a smart choice if you’re trying to lower your monthly payments or reduce the overall interest on your loan. A refinance could possibly save you thousands of dollars each year. Whenever rates are in the news, it can also spark an urgency to refinance before interest rates go up again. Before you rush to lock in a lower rate, consider the below to help you decide if you’re ready to refinance your loan.
Whether you want to refinance your mortgage, auto loan or student loan, there’s one thing you need to have, and that’s good credit. If your score is below 620, then you’re going to have a harder time qualifying to refinance. For instance, mortgage rates run on a sliding scale, which means applicants that have a good score of 720 or higher will receive the best rates. So make sure to check your credit score to see if it’s in good shape before inquiring any further about refinancing.
You may choose to refinance your mortgage in order to lower your monthly payments. This can be done by either extending your loan term (how many years you’ll be making payments) or lowering the overall interest rate.
For example, if you’re a homeowner who needs a little financial wiggle room each month, then refinancing from a 15-year mortgage to a 30-year mortgage could lower your monthly payment by $500 or more, which might be a life-saver. However, the longer your loan term, the more interest you will be charged over the course of the loan, so make sure you take that into account if you decide to extend the term of your loan.
On the other hand, if you’re a homeowner who has more disposable income, you might consider refinancing from a 30-year mortgage to a 15-year mortgage. You’ll increase your monthly payments, but you’ll save money in the long run because you will pay off your mortgage faster and pay less interest over the life of the loan. For instance, if you borrow $250,000 for a 15-year mortgage at 3.5% interest, you would only pay a total of $71,692 in interest during the term length vs. paying $200,685 in interest with a 4.4% interest rate on a 30-year mortgage.
You may also want to refinance from a 30-year into a 15-year mortgage if you’ve built up enough equity to refinance and reduce your loan term.
If you have student loan payments that are eating up a large percentage of your paycheck every month, then refinancing might be a good solution. You can refinance private or federal student loans to capitalize on lower interest rates for lower monthly payments, and you can refinance multiple loans into one loan to simplify your payments. You can also choose between a fixed-rate and a variable-rate loan to fit your savings needs. Just note that if you do choose to refinance federal student loans, you will lose certain benefits such as loan forgiveness and income-driven repayment plans.
What about refinancing an auto loan? Again, depending on your financial situation, it might be worth it, especially if interest rates have dropped a few points or if your credit score has improved since the time you bought your car. Like a mortgage, you can apply for a different loan with lower monthly payments, reduced rates or a different loan term. The application process is much easier than refinancing a mortgage.
Don’t forget, refinancing is essentially replacing your current mortgage or loan with a new one with a more favorable rate or timeframe, which means your loan term starts over. But if you have good credit and your financial situation can benefit from it, then refinancing might be worth its weight in gold, no matter the length of the loan term. Ultimately, it’s up to you to decide what’s best for you.
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