Refinancing: What Is It And Why?

The more financial terminology you know, the better prepared you will be to secure the best financial products and manage your debt. Today, we’re taking a look at refinancing. What is refinancing, why does it matter and what more do you need to know? Keep reading for the full scoop on refinancing.

What Is Refinancing?

Refinancing means replacing your current loan with a new loan, to receive more favorable terms. A refinanced loan may offer you a lower interest rate, a shorter loan term to pay off debt sooner, or a longer loan term to reduce your monthly payment.

You can refinance any loan: whether it’s a student loan, a personal loan, a car loan or a home loan. Even credit card debt can usually be refinanced and consolidated, to reduce your number of monthly payments and potentially offer a lower interest rate on the debt.

Why Refinance a Loan?

Most people refinance a loan to take advantage of a better interest rate. For example, if you took out student loans at age 18, your credit score 10 years later may be significantly higher—entitling you to get a lower interest rate by refinancing the loans. Borrowers may also opt to refinance if market rates fall below their current interest rate.

Beyond the question of interest rates, another reason to refinance is to change the length of the loan. Borrowers who can afford higher monthly payments may refinance to a shorter loan term, so they can pay off the loan faster and accrue less interest. Borrowers struggling to make monthly payments, on the other hand, can refinance in order to increase the length of the loan and lower their monthly bills.

Different Types of Refinancing

The main types of refinancing are:

• Mortgage refinancing—Home owners may refinance their home loan to get a better interest rate. On the other hand, some mortgage refinancing options allow borrowers to tap into their home’s equity to do repairs or borrow against the value of the house.
• Auto loan refinancing—You may be able to reduce your monthly payments or get a better interest rate by refinancing your auto loan.
• Student loan refinancing—Refinancing a student loan can offer a lower interest rate or, with a consolidation option, bundle multiple student loans into a single bill for easier monthly payments.
• Credit Card Refinancing—A typical credit card refinancing scenario involves opening a new credit card with zero-interest balance transfers and a 0% interest introductory period. On the other hand, it’s also possible to apply for a credit card debt consolidation loan, which moves the debt to a lower interest rate.
  
  Potential Risks of Refinancing
  
  As with any financial service, you can greatly reduce your risks by working with a reputable lender from an official organization, such as a federal credit union or bank. Pay attention to the fine print, especially if a lender claims to offer incredible loan terms for people with a less-than-stellar credit score. Remember the golden rule of borrowing money: if the terms look too good to be true, they probably are!
  
  No matter which lender you choose to help refinance your loan, you can expect an impact on your credit score. Lenders are required to check your credit score and credit history through a hard inquiry, which temporarily lowers your credit score. The same happens when you apply for a new credit card. Over time, as long as you continue to pay off your refinanced loan, your credit score will climb back up.
  
  Be careful about accepting the first rate you find for a refinanced loan. Shop around, as it’s possibly you could get a better rate for a different lender. There’s no need to stay with your current lender when refinancing, especially if you find a more favorable interest rate or terms with a new lender.
  
  Borrowers looking to refinance their credit card debt via a zero-interest balance transfer to a new card should carefully review the terms and conditions on offer. Consider the length of the 0% promotional period, the balance transfer fee and the post-introductory interest rate, then crunch the numbers to make sure a transfer is worth it.
  
  What Comes Next?
  
  Harvard Federal Credit Union offers financial advice and education to members, including on the topic of refinancing—whether you plan to refinance with us, or not. Get in touch online or check out the GreenPath Financial Wellness Program, which offers free financial counselling as a benefit of Credit Union Members.