Friday, April 25, 2008

How Refinancing Works

Refinancing has become an increasingly popular method of loan management in the past several years, but there are still a lot of people who aren't exactly sure what it means to refinance a loan or how refinancing works.

Though refinancing can be handled in different ways depending upon the lender and the type of loan that's being refinanced, refinancing is basically the process of taking out a new loan to cover the cost of a previous one so as to secure a lower interest rate or payments.

The process of refinancing as well as the benefits of a refinanced loan can vary depending upon several factors, and finding the right time to refinance a loan can sometimes be quite confusing.

Below, you'll find additional information on all of these factors to help you decide whether refinancing your loan is the right decision for you.

The refinancing process

The refinancing process is pretty straightforward when you know how to look at it… you take a loan that you've repaid partially that has a higher payment or interest rate, and then use another loan to pay it off.

The second loan should have a lower interest rate or a lower monthly payment, and more or less replaces the original loan… this can be especially useful if the original loan was taken out during a time when interest rates were high and interest rates have since dropped significantly.

Care should be taken not to attempt to refinance a loan with only a very small change in interest rate or payment, however… additional costs that some lenders associate with refinancing can end up with you paying more in the long run instead of less.

Benefits of refinancing

The main benefit of refinancing a loan, obviously, is that you can usually end up saving a significant amount of money from your original loan payment schedule.

Refinancing is also a good way to change the amount of your monthly payment, change the bank that the loan debt is owed to, or occasionally change other components of the loan.

Refinancing a loan can also be quite useful if some factor that influenced the original loan have changed since it was taken out, such as an old debt being discharged and your credit score significantly improving or you receiving a cutback on work hours and you needing to reduce the amount of your payments.

Loan refinancing can also be useful when you want to take advantage of promotions that banks or other lenders are running that offer you a better interest rate or loan terms than your original loan.

When to refinance

A big question that many people have when it comes to refinancing a loan is whether or not the time is right to refinance. To be honest, it largely depends upon the original loan… if the loan began with a low interest rate or with exceptional loan terms, then it's likely that refinancing might not be the best option.

If the original loan began with a higher interest rate, or if you've repaid a significant amount of the loan and think that you could secure lower monthly payments with a new loan, then refinancing might be a good option for you.

Before making your final decision, it's important to take a little bit of time to research the state of the loan market and find out which interest rates and terms are available… after all, you don't want to try to refinance if it's going to increase your interest rate or monthly payment.

You may freely reprint this article provided the following author's biography (including the live URL link) remains intact:

About The Author


Post a Comment

<< Home