So, you’ve decided to look into refinancing a loan. For the majority of borrowers, that can be a wonderful idea. When debts overwhelm you, it can be a method to get things back under control. Most of us have no choice but to take on debt of some kind. If you want a car or a house or higher education, you’ll need a loan. Even buying furniture and appliances for your home can come with debt, and most retailers count on you taking out a line of store credit to do it. This has led to a sharp increase in the number of predatory lenders and shady lending practices the average borrower has to deal with. Loans have always been a little bit predatory at least, but the number of pitfalls out there for borrowers these days mean that a loan can be equal parts a way to enable a better life and a prison that keeps them down.
That’s where refinancing comes in. There are certain options that borrowers have that can help get debt back under control and help make things easier moving forward, and refinancing is one of those tools, and a powerful one a that. As you can see at https://www.investopedia.com/terms/r/refinance.asp, refinancing is subjecting your loan to a complete restructure, producing a potentially more favorable loan and consolidating multiple debts into a single, more easily manageable one. This can help get your financial life back under control, and might be a life-changing way to approach your financial troubles. The options you have available are many, and the way it works can be a little confusing sometimes. This article will go over the different kinds of refinancing, as well as when it is and isn’t a good idea for you.
What Is Refinancing, Exactly?
Refinancing is pretty simple in theory. For a single loan, the whole thing is renegotiated and restructured to be more beneficial to the borrower, providing lower interest rates or monthly payments. Alternatively, or concurrently, multiple debts are brought together and combined into a single, more manageable debt, making it easier to pay off. Almost any kind of debt can be refinanced. It’s almost always a good idea to do so, as it can make things easier and more affordable for you under the right circumstances. However, there are instances where it might not be the best option. Those times are usually constrained to mortgages, and they require an understanding of how mortgages differ from other kinds of debt. Don’t worry, we’ll go over more details in our mortgage section.
A loan agreement involves paying back both a principal amount – that is, the amount you’re actually borrowing – and accruing interest in monthly installments. Interest is the real killer for finances, as it can build up quickly and overwhelm even the most fastidious of checkbooks. Refinancing can renegotiate a lower interest rate, making the process of paying it back easier. You can accomplish this through either banks or third-party companies. According to the BBN Times, refinansiering av gjeld – that is, debt refinancing – is best done through a third party rather than banks due to more competitive rates. The company pays off your original debt or debts, and you pay back the company directly. From your end, the only difference you’ll see is how much you’re paying every month.
Multiple loans undergo the same process, albeit with a little more detail. Instead of restructuring a single debt, the company you go through will pay off all of the negotiated debts, combining them into a single one. Instead of owing, for example, $3000 to a retailer, $500 to a credit card company, and $1000 to a hospital, you’d now owe $4500 to the company that consolidated your debts into one. With one new principal balance comes a single interest rate, which can substantially lower the amount you’re responsible for paying each month. This method is great for debts spread across different lenders, including student loans. However, this method is all but useless for mortgages, which have different considerations entirely from every other kind of debt. In the next section, we’ll explore exactly how mortgages differ from other kinds of debt.
How Are Mortgages Different?
French is a beautiful language. On top of being pleasant to listen to, it can put even the most terrible ideas into a beautiful, succinct way. For example, did you know that ‘mortgage’ is a French word that translates to ‘death pledge’? For the majority of us who can’t buy a house with a gigantic sack of money, a mortgage is our only option for home ownership, and the term ‘death pledge’ is an appropriate phrase for the feeling being under one evokes. Borrowing money is a necessity for buying a house, which means you’ll be under an immense amount of debt.
Managing a mortgage can be overwhelming, but refinancing can be an excellent way to bring it under control. This is especially true when you’ve been paying on it for a few years and have built up the credit to have earned a lower interest rate. As previously mentioned, this can lower your monthly payments and make repayment more feasible. A unique method of refinancing your home is via cash-out, where you renegotiate an amount more than what you actually owe and take the remainder in cash. Doing so is only advisable in extreme financial emergency, as you’re borrowing against the equity you’ve built up in your home. While this can free up some money for you, the decrease in value of your home will have long term financial repercussions.
However, there are circumstances where refinancing your mortgage isn’t in your best interest. Mortgage contracts are complicated, and altering or renegotiating them is also complicated. For one thing, you’ll need to pay the new closing costs for the house, which can be prohibitively expensive. As you can see here, there’s also the danger of extending your break-even period. This is the time it takes to, as the phrase might suggest, break even on your investment, and is calculated by dividing closing costs by your monthly savings. Refinancing runs the risk of extending this period if you do so in unfavorable circumstances, which should be avoided.
Should I Refinance Student Loans?
The answer to this is almost certainly yes. Unlike mortgages, student loans are similar to the kind of debt you’ll find with credit cards and retail lines, only significantly bigger and without the risk of having what you bought repossessed. It’s impossible to take back your education, but the tradeoff is that bankruptcy will not save you from student debt. Refinancing is an increasingly popular option for students, as it’s one of the only tools available to get it under control. There’s a massive crisis revolving around student debt. The amount a borrower is expected to pay back is frequently more than what they actually make in a month, and many people are having to choose between rent and making a monthly payment. Most of us have accepted that these debts will outlive us.
In fact, many students – myself included – have experienced the phenomenon where making monthly payments is effectively useless. Instead of lowering the amount owed, the insane interest rates make the amount rise regardless of repaying. Refinancing is an excellent tool for this problem. Through it, you’ll see your private and federal loans merged into a single one, which makes it significantly easier to manage. Additionally, the singular interest rate means that you won’t see the debt balloon out of control and increase with every payment. Frankly, refinancing can be one of the only real tools any of us has to make student loans manageable. Ultimately, the decision to refinance your loans is almost always a good one, and you would be wise to consider doing so if your loans are out of control.