When you have a home or auto loan that isn’t working out as well as you would like it to, you can always refinance that loan to get terms that better meet your needs. However, refinancing is not something to take lightly, given that it has some financial costs and can affect how much it will cost you to repay the duration of your loan. Consider several key pieces of information to make your decisions related to refinancing your mortgage or car loan.
Refinancing the loan is a fairly complicated process because you are basically applying for a new mortgage or auto loan. The amount on your new loan is equal to the amount you need to pay off your old loan. When your refinance goes through, the new lender sends the money to your old lender, paying off your old loan and replacing it with the new one. Therefore, you get to start making payments based on the new loan’s terms right away.
Before digging in, consider whether any of the benefits of refinancing appeal to you. When you refinance, you can generally get a different interest rate, different loan term, and different monthly payment. Increasing or decreasing one of these three factors will affect the others as well. In general, the lower your interest rate, the lower your monthly payment will be. In addition, the longer your loan term, the lower your monthly payment will be. For the lowest monthly payment, you should look for a low interest rate and long repayment term. For the least total cost in interest, you should look for a low interest rate and a short repayment term.
Keep in mind that with refinancing a mortgage, the closing costs on the mortgage will likely be about 2 percent of the amount you are refinancing. To make it worth the cost, you should plan to keep your refinanced mortgage for at least two to three years, or until you see enough savings in your monthly payments or in interest to recoup the cost of the refinance.
When you are ready to get started, decide how long you would like to have to repay your refinanced loan. In general, unless you really need to lower your monthly payment, you should choose a repayment term equal to or less than the remaining term on your existing loan. If you are stuck deciding between two terms, get quotes for each of them from each lender. Make sure to get interest rate quotes from at least three different lenders. One of them can be your current lender, who might be able to offer you a better rate than you are currently paying because market rates changed or your credit score got better.
In addition to interest rates, look at each loan’s other terms, including the costs to refinance and what special conditions it has. For example, some car loans have a prepayment penalty, which forces you to pay extra if you choose to pay off the loan early. When you have picked the right loan for you, fill out the application paperwork and provide the lender with any supplemental documentation to complete the process.