If you’ve been following the news as of late, you know there’s kind of a lot going on. Corona-virus is kind of dominating the headlines, and if you follow the stock market, the fear of an impending pandemic has certainly rattled the markets and caused things to fall in value. One interesting side effect of this downward trend is interest rates also falling. We live in a world where debt is super common, so you or someone you know probably has: a mortgage, student loans, and a car loan or credit card debt. Debt works with someone (the lender) giving you a large sum of money now, which you then use immediately (or at your leisure). You agree to an interest rate, which is the fee associated with borrowing money, and make small monthly payments (plus the interest) until the loan is paid off. Loans can be short, or they can be very long (30 years for a mortgage) depending on the agreed upon terms. Sometimes, you may feel the need to want to restructure that loan, or the loan terms, and to do that, you refinance. Let’s jump into a few refinancing FAQs. 

How does refinancing work?

Refinancing in it’s most common format involves a new lender agreeing to re-loan you the money you owe the first lender, likely at different terms (different interest rate, longer payback etc.). You then use that money and the first lender gets paid off in full, and you start making payments to the second lender. The refinancing process involves having the new lender review your current loan(s) and your credit and financial situation. Things like credit score, available assets, and other loans will come into play here. 

The process can be relatively quick for smaller type loans, and can be a little longer for larger loans (i.e. a house). Note that your credit score will likely be pulled as an inquiry, so don’t just apply all over the place as an inquiry often lowers your credit score by a few points. There may be fees to pay to refinance, which can be paid upfront or lumped into the loan itself and paid over time. From there it’s business as usual and you keep making payments to the new lender. 

Why would someone refinance?

There are probably tons of reasons why you would consider refinancing, but we can boil it down to 4 major ones:

1. Lower interest payment

One of the most common reasons to refinance is to get a lower interest rate. Interest rates fluctuate and may change, either higher or lower. When interest rates go lower, refinancing at a lower rate will mean less total payments over the life of the loan. Depending on the amount, length and interest rate difference, this could be hundreds if not thousands of dollars! I’ve refinanced my house twice, once from 5% to 3.875% and once from 4.5% to 3.6%. Both times my monthly payment and total interest went down a lot and it was a no brainer! 

A quick google search can help you do the math to make sure it’s worthwhile but with houses, I think if you’re getting more than a 0.75% reduction, it probably makes sense for your loan. 

Same will hold true with student loans, credit card debt or car loans. Depending on when you got the loan initially, it could be quite high, so refinancing at a lower rate can be a win-win for you! 

2. Consolidate loans into one

One of the YMF financial truths is to attempt to minimize the amount of places we hold and manage our money, and same holds true with debt. If you’re juggling many loans, it can be tough to keep up with all the payments, when they’re due, how much to pay, how much is left, and what interest rate you have. Sometimes it can make sense to refinance many loans into one big loan. This especially holds true with student loans. For example, Mrs. Money had around 5 separate student loans upon graduating from college. She was able to do a consolidation, which made things much easier. She also got a lower total interest rate! Paying one loan made things easier from an administrative perspective. 

3. Get cash out 

You often see the ‘cash out’ option with refinancing a home. This can also be described as a home equity loan, but similar idea. What happens here is as you refinance your home; you end up pulling out some money that you’ve already paid, and lumping that into the loan. For example, we currently owe about $167K on our house. If we wanted to refinance, we could borrow more money, and then owe them $175K, $200K, or whatever we wanted really. I routinely get flyers in the mail from my lender letting me know I could get $100K out of my house to borrow if I wanted to. The benefit here is that I’d be borrowing that money against my house, and mortgage rates are often low (<4% right now), while other loans are much higher. So, the thinking is, you could use that money to pay off higher interest rate loans, like 6% or 8% student loans, or 15% credit card payments. It’s not a bad option to be honest, as it’s smart to borrow money at the lowest interest rate that you can! 

4. Lower monthly payments

Another good play for refinancing is to lower your monthly payments. Imagine you are 5 years into a 30-year mortgage. You’ve diligently paid your monthly payments but feel they are a bit higher than you would like or can afford. Maybe something has changed in your job situation, or would just like more breathing room in your budget. When you refinance, you’ll set the loan length, and likely you would borrow again for another 30 years. So, that 25 year loan will be re-stretched out again to a 30 year, thus lowering your monthly payment. Of course it’s another win if you’re getting a lower interest rate! On a large home loan it could be pretty substantial, and end up saving you a few hundred dollars each month! 

There are many different reasons to refinance, and all are valid! 

What should I refinance?

I’d say that student loans and mortgages on your house are the most common things that people refinance, but I’ve also seen credit card refinancing as well. You can often get creative and strategic when it comes to refinancing, and in refinancing one, could pull in a few other loans potentially by borrowing more money. Figure out what you want to refinance and start talking to lenders to see what’s available. 

When does it make sense?

Really if you’re able to meet your goal(s) that you set earlier in this post (lowering monthly payments, consolidating, borrowing money or lower interest rate), I’d say it can make sense. Do be careful about any lender fees, as that could tip the equation a little bit in terms of it being a no-brainer. I would encourage you to take a good look at your current debt and figure out what makes the most sense for you! There are plenty of tools and calculators out there to help in this endeavor! 

How should I get started?

In today’s world, there are TONS of lenders out there, not just at your traditional bank (although a bank’s not a bad place to get started). For refinancing a house, you can even talk to your current lender. Shop around, do research online and find one that gives good rates, good service and is easy to work with. I’m a big fan of Better.com for refinancing mortgages (they are not paying me to say that), it’s so easy and quick to use, and all online! For student loans, there are great sites like SoFi or Earnest (I do have an affiliate relationship with Earnest but would recommend them even if I didn’t). For more personal loans or if you’re struggling to get approved, LendingClub or Prosper are also solid options. 

Shop around (ideally without having your credit ran), read reviews and find the one that makes the most sense for you! Remember – lower rates, lower fees, better service is what you’re looking for.

Now can be a great time to refinance, or at least start looking! Don’t be afraid or timid or overwhelmed at the idea of it – it never hurts to do a little research, and it can be a great win for you both now and in the long run over the life of the loan!