The day you received keys to your new home or car is one you'll always remember. It was likely filled with excitement - and paperwork. While the excitement has probably diminished, the monthly payments have remained the same. Refinancing your loan can help lower payments and save money on interest charges.
When you refinance, you use a new loan to pay off the original loan.
But how do you know when it makes sense for your finances? A refinance might be a good option if:
You have a financial goal.
When you have a clear purpose for refinancing your loan, deciding between various loan options is easier. If your goal is to increase cash flow, consider refinancing to a longer-term loan. The extended repayment period can lower your monthly payment, but you'll pay more in interest over the life of the loan. Use a refinance calculator to estimate the monthly payment savings.
Your credit score or income has increased.
Loan approvals are based on multiple factors. Credit scores and income are two factors that have the biggest influence on your ability to refinance at rates and terms that will help you reach your financial goal. High credit scores open the doors to the lowest available interest rates and an increase in income affects your debt-to-income (DTI) ratio.
Ideally, as your income increases, your debt obligations decrease. The less existing debt you have in relation to your income, the greater likelihood you will qualify for your preferred loan.
Interest rates have decreased.
Lower interest rates offer a unique opportunity to save money. If saving money is of primary importance, refinance to a lower interest rate while keeping the repayment term the same. You're not limited to refinancing single loans. Suppose you have multiple loans with various interest rates and terms. In that case, you might consider paying them off with one new lower interest rate loan.
Since a loan refinance may have fees or other costs, perform a breakeven analysis to ensure you'll meet your financial goal despite the added expense.