Whether you’re dealing with a mortgage, student loan, or credit card debt, refinancing might be a good option if you want to save some money. However, it’s not always a good choice for every situation. Learn about the pros and cons of refinancing so you can decide if it’s right for your situation.
What Is Refinancing?
The first step to deciding whether refinancing is right for you is understanding exactly what is refinancing. It’s the process of getting a new loan to replace an old loan. When you refinance a loan, the new loan will pay off the debt of your old loan. While your debt isn’t eliminated, you typically get better terms, which can help you save money.
How Does Refinancing Save You Money?
Refinancing can save you money in several ways. You can get a lower interest payment, which will help you pay less over the life of the loan. A lower interest rate can also lead to lower monthly payments, which means you’ll have more money remaining for other expenses. If you’re refinancing a mortgage, you could look to shorten the loan term. This would help you get to the point where you’re free from paying a mortgage.
Refinancing Credit Cards
If you’re struggling with credit card debt, refinancing can help. One of the simplest ways to refinance a credit card is to open a new account that offers a special zero percent interest rate. Then you just transfer your balance from your original card, and you have some time to pay down the balance without interest. It’s important to make sure you don’t put any new purchases on this card while you’re paying it down. Additionally, keep in mind these special rates don’t last forever. You might have to pay a small fee upfront to transfer balances.
Refinancing Student Loans
Many people religiously pay their student loans every month without realizing they can refinance these loans to save money. Private student loans typically have variable interest rates based on your credit history. When you first take out the loan, you’re young and you have a small credit profile. This means lenders consider you a higher risk. However, after you graduate, obtain a job, and start making regular payments, your credit risk goes down. This can help you qualify for a lower interest rate on your loan.
When you refinance a mortgage, you might be able to lower your interest rate, consolidate debt, shorten the term of your mortgage, or use your home’s equity to finance a larger purchase. Just remember that closing costs can add up to thousands of dollars, so you’ll want to make sure your savings will let you more than break even before you start the process.
Everyone likes to save money, so refinancing sounds like a great option. However, keep in mind that refinancing is a time-consuming process that can get expensive, so you need to weigh the pros and cons before deciding if it’s right for you.