Choosing to refinance a loan can be a major decision, especially if that loan is a major loan such as a mortgage or automotive financing. If you refinance your loan too soon, you might end up doing more harm than good and not be able to do much to correct it? but if you wait you might end up missing out on a good deal that isn’t likely to return.
Before you make the decision to refinance, you should take the time to make sure that you understand exactly what refinancing entails and should look at the various signs to determine whether or not the time is actually right for you to refinance your loan.
Below you’ll find some basic information on what refinancing is as well as information that might help you to make the decision as to whether or not it’s the right time to take that step.
What Refinancing Is
Though the name may suggest that refinancing a loan is simply a negotiation of the loan’s terms, it is actually a separate loan that is used to pay off the remainder of the original loan at the new loan’s interest rate and payment cycle.
Refinancing can be done at the bank or lender from which you received the original loan or at some other lenders; this can be beneficial if you’re wishing to change banks or lenders but are worried about the outstanding loan that you currently have.
The refinance loan usually uses the same collateral as the original loan, though in some cases you can change the collateral and use the new collateral to attempt to get a lower interest rate.
Whatever collateral was used for the original loan will be free of lien should you use new collateral; the original loan has been completely paid off by the refinance loan, so any collateral or other factors that applied specifically to the original will not apply to the new loan.
There may be certain factors, such as the requirement by many lenders that you have homeowners insurance for mortgage loans, that may carry over to the refinance loan as well.
How to Tell if the Time Is Right
If you’re thinking of refinancing, you should begin by looking at current interest rates for loans and trends in refinance lending. Many finance journals, newspapers, and tabloids will have information on whether national interest rates are likely to change soon and whether they will increase or decrease, so that is a good place to start.
You should also look at your current loan and how much of it has been repaid? unless you get a really good deal, it’s generally not worth the trouble to refinance a loan unless you’ve been making payments for a year or more since the difference in the original amount and the refinance amount won’t be significant.
Consider your current monthly payment and interest rate and determine whether you’ll be likely to get a better rate and lower payment from a new loan, and then shop around at various lenders so as to find the best rates available.
Signs that the Time Isn’t Right
Should you find that interest rates are at a higher level than what you’re currently paying or that you haven’t paid off a significant portion of the original loan, you might want to wait before refinancing.
It’s possible to end up paying more in interest or monthly payments than your original loan when you refinance, so you should always take care to do a bit of research before deciding to commit to a refinance loan.
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