Have you heard of refinancing, but don’t fully understand the benefits? Read on to learn about the process and decide if refinancing is right for you.
What is Refinancing?
Regardless of how long you’ve owned your home or vehicle, refinancing is a big financial decision and should involve careful consideration. It’s essential to understand your personal goals, financial well-being, and the process of refinancing. Let’s start with the basics.
Refinancing allows a borrower to replace a current loan with one that has more favorable terms. During this process, the borrower takes out a new loan to pay off existing debt, and the terms of the old loan get replaced with updated terms. Borrowers refinance for all sorts of reasons. It might help them save money with lower interest rates and lower monthly payments. It could also help them pay off debt faster or slower. There are many other reasons to refinance, but that decision should depend on your unique financial situation.
Mortgages
Homeowners refinance their mortgages all the time. Some refinance to take advantage of lower interest rates. In this case, refinancing could help the homeowner to save hundreds, if not thousands, of dollars over the life of their mortgage. Others refinance to decrease or increase the duration of their mortgage. For example, changing a 15-year loan to a 30-year loan would give a homeowner more time to pay off their mortgage and would likely result in a lower monthly payment amount. In contrast, changing a 30- year loan to a 15-year loan would raise their monthly payment, but allow them to pay off the balance much faster.
Other homeowners will use a cash-out refinance. A cash-out refinance replaces your existing mortgage with a new home loan for more than you owe on the house. The difference is returned to the borrower in cash to spend on home improvements, large purchases, or other financial situations.
It’s important to note that if you refinance your mortgage, you would be required to pay closing costs. Keep this in mind when choosing which lender to use. Some lenders, like Cedar Point Federal Credit Union, offer very low closing costs.
Auto Loans
There are numerous reasons to refinance an auto loan as well. If a vehicle owner settled for a higher interest rate due to a low credit score, she might be offered a better rate after working towards better credit. Perhaps the owner’s financial well-being has changed, so she needs a different monthly payment, whether it be lower or higher. Even better, maybe interest rates have dropped, and she wants to take advantage of a lower rate.
Many people don’t realize that interest rates change over time. Hypothetically, let’s say a vehicle owner got an auto loan with a 7% interest rate. However, a few years later, the average rates have dropped significantly to as low as 4% APR (Annual Percentage Rate). Refinancing would allow her to take advantage of this lower rate. This seemingly small change could end up saving her hundreds of dollars over the life of the loan.
Now that you have a better understanding of refinancing, carefully consider whether refinancing your loan is right for you. Determine what your goals are and how refinancing could help you reach them. Consider making a list of pros and cons. Explore your options at a local financial institution like Cedar Point Federal Credit Union. It’s a good idea to speak with a financial professional or even a trusted friend. Maintaining your financial well-being is essential, so make sure you take the appropriate steps to set yourself up for success.
Cedar Point consistently offers some of the lowest interest rates in Southern Maryland. Contact us today to discuss! Visit www.cpfcu.com or call 301-863-7071 for more information.
