Refinancing is an option that many should consider at some point when managing their finances. Though it can be a scary option to consider, it does come with a range of benefits that might suit you. However, it can be difficult to know precisely when you should refinance, and why you should look to do so.
What is Refinancing?
Refinancing is quite simple – it is when you take out a loan to pay off an existing debt, leaving you with the new loan to pay off. More often than not, this new loan will have terms that are more favorable to you, so you are in a better position when it comes to paying it back. Refinancing is typically used for mortgages, but it can be used for personal loans and car payments, or anything else where you might be paying off a sum of money over a period of time.
If you are looking to shift your finances and make them a little more manageable overall, you should consider refinancing. You might be paying much more than you really have to, when there could be a much better deal waiting for you out there.
When Should You Refinance?
There are several main reasons why you might choose to refinance at one time over another. Ideally, you need to keep an eye on interest rates and a few other factors. Doing so will give you the perfect time to act.
One of the main reasons why people choose to refinance is because interest rates have dipped below what they are currently paying. If you have a fixed-interest loan and the rates go down below what you are paying, it makes sense to refinance. Likewise, you might want to pay off the loan a little faster than you initially thought you would. In the case of a mortgage, this would mean that you would own your home sooner!
You could also be looking to free up some of the equity in your home, or the amount that you have paid off thus far. For example, you might decide that you want to renovate the house majorly – potentially extending it or changing high-value areas like the kitchen and bathrooms. These changes could mean that your property as a whole can be more valuable. One of the ways to afford such changes is to use your home’s equity.
Will This Harm My Credit Score?
Before taking out any loan or making any changes, you always need to be aware of the impact that it will have on your credit score. There is a chance that refinancing may hurt your credit score, but with the right actions, it should hopefully not impact it too much.
It is important to remember that your credit score as a whole will not be majorly affected by choosing to refinance your loan. This will be a hard credit check, not a soft one, so it will flag up to anyone who decides to run a credit check on you. However, this will only be on your report for two years, and regular loan repayments should help your score overall to bounce back with time.
How Do You Refinance?
When you decide to refinance, there are several ways in which you can go about the process. The first is simply to speak to your existing loan provider. They should be able to start you on a path to find the new arrangements that you want. After all, most loan providers have a range of products for customers. Your advisor might be able to make a few quick changes, and that is all that is needed to get you your new deal and a better rate to pay off.
However, you might not be satisfied with your current provider, and are therefore keen to move to a different one that is able to offer you a better service altogether. This will obviously require a lot more on your part, and you will need to do your research to ensure that you do find a provider who will offer you the services you want to see.
After all, you don’t want to end up with a deal that is worse than the one that you currently have. Make sure that you find a new provider who specializes in refinancing, as they should be able to help you navigate some of the hoops that you will have to jump through here.
Should You Refinance Your Loan?
Refinancing is a fantastic option that can help you manage your loans much more effectively. If you think that the rates are in your favor, and it could potentially lead to you gaining lower monthly payments or even paying off your loan that bit much faster, refinancing could definitely be an option that you consider.
However, you have to be aware of some of the effects that it could have upon your credit score. Your credit score will be impacted by the change. For some, it will be little more than a blip. For others, it could be a fairly major setback in your plans to rebuild your credit and make them better than ever before.
You need to make sure that you are fully informed on any decision you make here, just as you were when you initially took out the loan. With smart choices and the right guidance, refinancing your loan could be the correct decision for you to make.
