A Beginner’s Guide to Refinancing Debt

Debt, whether from a home loan, student loan, or any other kind, can be a significant burden on your shoulders. If you have a debt costing you too much or too risky for you, consider the option of refinancing.

We live in a dynamic world where things keep changing every second. It's the same with your debt. Certain factors may have changed since you borrowed the money, and you may now have a chance to improve your loan terms. Debt refinancing allows you to move toward a better and more stable financial situation.

What Do We Mean by Debt Refinancing? 

Refinancing is the process through which the borrower revises the interest rate, payment schedule, and other terms of the previous loan agreement. Ideally, you should choose to refinance a loan agreement when:

• 1. You would like to improve your current loan in some way.
• 2. You find a creditor with better loan terms.
• 3. A new loan can pay off your previous debt.
• 4. You can make payments on the new loan until you pay it off or refinance it.

Pros of Refinancing

Although debt refinancing takes a lot of time and can be costly, it does have several advantages that can benefit you in the future.

• Saves money: The first and foremost advantage of debt refinancing is that it helps you save money on interest costs. You need to refinance a loan with an interest rate, which is lower than your current rate. Especially with long-term debt and vast amounts of money, lowering the interest rate can save you a lot of money.
• Reduced monthly payments: As you refinance your loan, you also pay lower monthly payments. This leads to more cash in hand for your budget and other monthly expenses.

When you refinance, you restart the payment cycle and extend the time you'll need to pay off the debt. Since your balance is smaller than your previous loan balance, and you have more time to repay, the new monthly payment automatically decreases.
Reduces the loan term: With debt refinancing, not only can you extend your repayment duration but also choose a shorter term for your loan. For instance, you have a 30-year-old home loan that can be refinanced into a 15-year home loan, and it would usually charge you a lower interest rate as well. You can also make extra payments without refinancing if you want to avoid paying closing costs.

• Things to Keep in Mind: While refinancing can change the terms of debt, some aspects of debt stay the same even with refinancing.
• Loan balance: Your debt will only change if you take on more credit while refinancing. However, it's possible to cash out or roll your closing costs into your loan. However, it is only sometimes advised to do so as it just adds on to your debt burden.
• Collateral: If you have put up some collateral for the debt, the collateral will likely be required for the new loan. For instance, refinancing your home loan implies that there is still a possibility of losing your home in foreclosure if you fail to clear your debt. Similarly, your car can be forfeited in the case of auto loans.

Your collateral is at risk unless you refinance into an unsecured personal loan. In fact, in some cases, you can unknowingly increase the risk to your collateral while refinancing. In some states, non-recourse home loans can become recourse loans after refinancing.

 

When Should You Refinance?

The apparent reason for debt refinancing is to save money, but you should consider the following factors before you refinance any loan, primarily when refinancing your title loan.

• Better credit score: If you have a low credit score because of a financial crisis, you may get a loan at a high-interest rate. If you took an auto loan or any other loan with a low credit score, your interest rate would be high. However, if you've improved your credit score, you can refinance that loan at a lower rate.
• Remodeling/renovating house: When you have a lot of equity in your home, you can reinvest that equity. Depending on your desire, you can remodel your entire house or do some long-needed repairs. If your credit is good, you can choose to refinance cash out. For instance, you bought a home for $250,000, which currently has a market value of $300,00. When you cash out the mortgage, you make a down payment of $50,000 toward the principal. This implies that you will owe $150,000 on a home with a market value twice that amount. You need $25,000 for home repairs; then you could refinance your mortgage for $175,000. Your current debt of $150,000 would be paid off, and you would have an extra $25,000 and a new mortgage for $175,000.

Depending on the available interest rates and duration of the new mortgage, you can lower your monthly payments with refinancing.

How to Refinance? 

If you're thinking about refinancing your loan, you should first do an in-depth analysis of your financial needs and the current loan terms of your debt. Figure out how much you are paying at present and check if there is a prepayment penalty on your existing loan. As a general rule, the cost of debt refinancing should be lower than the prepayment penalty.

After evaluating the value of your current loan, compare between a few lenders to find the loan terms that best fit your financial goals.

For instance, if you are considering refinancing your home, find out what kind of rates you can get from competitors before asking your current lender. You could get a better term if your current lender wants to keep your mortgage.

Final Words 

Whether you want to modify your loan period or lower your interest rate, there is a wide range of loan options from which you can choose. In fact, several new online lenders are competing with traditional banks, providing services and packages customized for all financial goals. It's always wise to research as much as you can before taking the plunge so that you can choose the best way to refinance the debt.