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Refinancing: A Complete Guide to Lowering Your Monthly Payments
Everything You Need to Know About Refinancing
Are you considering refinancing? Refinancing can be an excellent way to save money and achieve your financial goals. In this article, we’ll cover the basics of refinancing, including the types of loans you can refinance, how to refinance, and common FAQs.
What is Refinancing?
Refinancing is the process of replacing an existing loan with a new one that has more favorable terms. Refinancing can help you save money on interest, reduce your monthly payments, and achieve other financial goals, such as consolidating debt or shortening the repayment period.
Types of Loans You Can Refinance
There are several types of loans you can refinance, including mortgages, car loans, and student loans.
According to the National Association of Realtors, mortgage refinancing activity reached a record high in 2020, with 6.9 million homeowners refinancing their mortgages. Mortgage refinancing can be an excellent option if you want to lower your monthly payments, reduce your interest rate, or shorten the repayment period.
“Refinancing your mortgage can save you thousands of dollars over the life of the loan,” says Ryan Fitzgerald, a real estate agent and owner of Raleigh Realty. “For example, if you have a 30-year mortgage with a 4.5% interest rate and refinance to a 15-year mortgage with a 3% interest rate, you could save over $100,000 in interest payments.”
However, it’s important to note that refinancing isn’t always the best option. “Refinancing may not be worth it if you plan to move in the near future, have a low credit score, or have already paid off a significant portion of your mortgage,” says Fitzgerald.
Car loan refinancing can also help you save money on interest and reduce your monthly payments. According to a study by LendingTree, the average savings on car loan refinancing is $1,416 over the life of the loan.
“Car loan refinancing can be an excellent option if you have a high-interest rate or want to lower your monthly payments,” says Priyanka Prakash, a lending and credit expert at Fundera. “However, it’s essential to shop around for the best rates and terms, as not all lenders offer the same options.”
Student loan refinancing can help you lower your monthly payments, reduce your interest rate, and even consolidate multiple loans into one. However, it’s important to note that refinancing federal student loans may cause you to lose certain benefits, such as loan forgiveness or income-driven repayment plans.
According to a report by the Brookings Institution, refinancing federal student loans can help borrowers save money on interest and reduce their monthly payments. “On average, refinancing federal student loans can save borrowers around $259 per month,” says Adam Looney, a nonresident senior fellow at Brookings Institution.
How to Refinance
If you’re interested in refinancing, here are the steps to follow:
Step 1: Determine Whether Refinancing is the Right Option
Before refinancing, consider your financial situation and goals. Determine whether refinancing can help you save money or achieve other financial goals, such as consolidating debt or shortening the repayment period.
Step 2: Shop Around for Lenders
Start by shopping around for lenders that offer refinancing options. Consider both online and local lenders and look for lenders that offer competitive interest rates, low fees, and excellent customer service.
Step 3: Gather Your Documents
To complete the refinancing process, you’ll need to provide documentation such as proof of income, employment verification, and credit reports.
Step 4: Apply for Refinancing
Once you’ve found a lender, submit your application for refinancing. Be prepared to provide detailed information about your current loan, your financial situation, and your goals for refinancing.
Step 5: Close the Refinancing Loan
If your application is approved, you’ll need to close the refinancing loan. This may involve paying closing costs, such as appraisal fees and title fees.
Here are some common FAQs about refinancing:
Is Refinancing Worth It?
Whether refinancing is worth it depends on your financial situation and goals. Refinancing can help you save money on interest, reduce your monthly payments, and achieve other financial goals. However, refinancing isn’t always the best option and may not be worth it if you plan to move in the near future, have a low credit score, or have already paid off a significant portion of your loan.
How Much Does Refinancing Cost?
Refinancing costs can vary depending on the type of loan you’re refinancing, your credit score, and the lender you choose. Common refinancing costs include application fees, appraisal fees, title fees, and closing costs. Before refinancing, it’s important to carefully review the costs involved and determine whether the savings are worth the upfront costs.
How Does Refinancing Affect Your Credit Score?
Refinancing can affect your credit score in several ways. When you apply for refinancing, the lender will typically perform a hard credit inquiry, which can temporarily lower your credit score. However, if you make timely payments on your refinancing loan, it can help improve your credit score over time.
Refinancing can be an excellent way to save money on interest, reduce your monthly payments, and achieve other financial goals. However, it’s important to carefully consider your financial situation and goals before refinancing, and to shop around for the best rates and terms. By following these steps and staying informed, you can make the best decision for your financial future.