Monday, April 28, 2008

Refinancing to Lower Monthly Loan Payments

It can be frustrating to go through the loan process only to have interest rates or payment terms to change drastically within a year of you signing the loan papers.

Of course, depending upon the type of loan that you applied for and the loan terms that you agreed to there might not be many options available to you other than simply paying off the loan as quickly as you can… in most cases, however, you'll likely be able to refinance the loan in order to lock in the new lower interest rate or modified repayment terms.

Here is some basic information on what refinancing is and how it works, as well as whether or not the time is right for you to refinance your loan.

What Refinancing Is

Basically, refinancing is the act of applying for a new loan in order to cover an older loan. Generally it is done in order to get a lower interest rate or to alter the overall payment plan associated with the original loan, though there may be other instances where refinancing a loan can be useful as well.

Examples of these occasions might be when taking over the payments on a loan for another individual, eliminating a cosigner from a loan, or renewing a loan that was coming due in the near future so as to get more time to repay it. Of course, you may have other reasons for refinancing as well.

How Refinancing Works

As mentioned above, refinancing allows you to replace the interest rates and payments of an older loan with a new set of rates and terms. While many people consider refinancing to simply be a renegotiation of the original loan terms (since it uses the same collateral and the amount remaining to be paid on the original loan), a refinance loan is actually a separate loan.

When you apply for a refinance loan, you're applying for a loan for the amount that remains on the previous loan or in some cases, an additional amount.

The money that you receive goes toward the original loan payment, usually paying it off in full… you are then left with the new payment plan on the refinance loan, paying the interest rate of the refinance loan instead of the original loan.

Because it is a separate loan, refinance loans can even be applied for from a different bank or lender than the original loan a useful feature if you can find a lower interest rate elsewhere or simply wish to change the bank or lender that you're doing business with.

Deciding Whether or Not to Refinance

It can be difficult at times to decide whether or not you should refinance a loan. Interest rates tend to fluctuate throughout the year, though the difference in a new rate and your current rate might not be enough to warrant refinancing your original loan especially if the rate is likely to drop lower soon. Hesitating too long or refusing to refinance when the time is right can end up costing you additional money in the long run, however.

When trying to determine whether or not the time is right to refinance, you should look at your situation and weigh the benefits of refinancing.

Look at the amount of time that you've had the original loan… if it's only a few months to a year, you probably shouldn't refinance unless a spectacular deal presents itself.

Compare the interest rates from your current loan and the refinance loan… do the same with the monthly payments. With careful consideration, you'll find the answers that you're looking for one way or another.

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