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What Does it Mean to Refinance a Loan?

What you need to know about refinancing.

Tired of the terms on your student loans? Wishing you could switch from a variable rate to a fixed rate for your mortgage? Want to find a way to lower the monthly payments on your auto loan? If so, it might be time for you to refinance a loan.

So, what is refinancing all about and how can it help me and my personal finances? In this article, we’ll explore this question so you’re educated before making this big financial decision.

What is refinancing?

According to Investopedia, “a refinance, or refi for short, refers to revising and replacing the terms of an existing credit agreement, usually as it relates to a loan or mortgage.” You can complete a refi for most loans, including a mortgage, student loans, car loans, and more. Generally, people will choose to refinance to either obtain a lower interest rate, a lower payment, or even to change the loan type.

What are some of the perks when I refinance a loan?

As with any financial decision, it’s important to weigh the pros and cons. Here are some of the perks when you refinance a loan:

  • You can potentially take advantage of a lower interest rate which will ultimately help you save money over time.
  • You can also potentially take advantage of lower monthly payments.
  • There's also an opportunity to reduce the term of the loan, shortening the payback period.
  • If you have a variable rate, you can change to a fixed rate, helping you gain more predictability with your monthly payments.

What are some of the cons when I refinance a loan?

On the other hand, it’s also important to understand the risks of each financial decision you make. Here are some of the cons to the refinancing process:

  • There are some costs and fees associated with a refi.
  • A credit check will be done, so there could be a temporary impact to your credit score.
  • There’s also a potential that you’ll have to pay the loan for a longer period of time, or possibly even more interest.

How do I know if it’s time for me to refinance a loan?

You’ll want to spend some time looking at your personal finances to decide what benefit you’re looking to gain. There are plenty of refinance calculators to help you determine if this process makes financial sense for you. In the long run, choosing to refinance a loan will usually pay off as long as you get the benefits you were looking for.

When you’re ready to refinance a loan, make sure to do your research, weigh all the pros and cons, and reach out for help. And remember, our team at Clearview is ready to help you throughout the whole process!

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