How to refinance everything in your life
Let's play a little word-association game. What comes to mind when you hear the word "refinance"? If you answered "mortgages," you're not alone. A mortgage is the one type of loan that's probably most frequently associated with refinancing. But refinancing goes beyond just helping people give their mortgages a makeover: Did you know that the concept of a refi can apply to just about any kind of loan, from your student loans to your auto loan?
Whether you're renting a pricey studio apartment in San Francisco, CA, or a home in Richmond, VA, if you're a renter with any type of loan, it's worth understanding how the process works — and how it can help you.
How can renters take advantage of refinancing?
You can refinance almost any type of debt, not just mortgages. If you have car loans or student loans, for example, you may be able to refinance them. Refinancing simply means you're taking one loan and replacing it with another, with the new loan having different (and preferably more favorable) terms than the old one. You may want to refinance a loan to get a better interest rate than your original debt carries or to reduce the monthly payment you make. You can also consolidate many loans into a single one. Any of these outcomes can make personal debts easier to manage — and therefore easier for you to repay.
If you have a variable-rate loan and long for a more stable monthly payment, you may want to refinance simply to secure terms that present a little less risk. For example, swapping that variable-rate loan for a loan with a fixed interest rate could help with budgeting. But if you're thinking about refinancing a loan to enjoy one or more of these potential benefits, it's important to understand that there are two kinds of refis to choose from: rate-and-term and cash-out.
What you need to know about rate-and-term refinancing
If you're interested in refinancing something like an auto loan or student loans to get a better interest rate or change the loan term, consider rate-and-term refinancing. This type of refinancing can be beneficial to borrowers if you originally took out your loan when interests rates were much higher than what you can get today. It's also helpful if you need to alter the amount of your monthly payment. A refi can update the loan term, and changing the length of that term will impact how much you owe each month.
What about cash-out refinancing?
Cash-out refinancing offers you an interesting option. Going with this type of refi means that your new loan is for more than your existing loan. You get the difference between the new loan and the old in cash. It's great to have this extra money in hand, but keep in mind, this increases the debt that you carry. You'll need to repay the entirety of the loan plus the cash you received, and you'll have to pay interest on all of it.
Before refinancing everything, consider the downsides
While both these refinancing options can be helpful to borrowers, there are some downsides. Just because you carry some debts doesn't mean a refi will help you manage your repayment or will save you money over time.
If you want to refinance student loans, for example, you need to remember that this process replaces your old debt with a new one — and that new loan will come with new terms and benefits. Some federal loans are eligible for benefits like payment programs or even loan forgiveness. If you refinance, you could be disqualified from accessing that repayment help.
And refinancing any loan comes with a cost. You'll be originating a whole new loan, so expect to pay fees just like you did when you originally borrowed the money. This could eliminate any savings you'd accrue over time via a lower interest rate, so always do the math before making your decision. Refinancing could cost you more money in interest over time too. Changing the terms of your loan may lower your monthly payments, but it could also mean you make those payments for a longer time. Stretching out the life of your loan also means paying more in interest. It's important to weigh the costs, because you might be surprised to find that continuing to pay down your current loans could remain the best option for you.
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Bottom line: Should you consider refinancing your loans?
Ultimately, the decision of whether to refinance the loans in your life will depend on your personal situation. Are you doing well in managing the repayment of your debts? If so, you may be better off continuing to do what you've been doing to pay down those balances and reach debt freedom. If, on the other hand, you could secure a lower interest rate, get a more manageable monthly payment, or enjoy better terms on a new loan, consider refinancing. Refinancing isn't just for homeowners, so don't be afraid to find out if a refi could improve your financial life.