In the current landscape, refinancing is a useful tool for one’s financial journey. People refinance for a variety of reasons.  Many things such as home loans, car loans, student and personal loans can be refinanced. Let us look at what all goes into a refinance.

A refinance, or “refi” for short, refers to the process of revising and replacing the terms of an existing credit agreement, usually as it relates to a loan or mortgage. When a business or an individual decides to refinance a credit obligation, they effectively seek to make favorable changes to their interest rate, payment schedule, and/or other terms outlined in their contract. If approved, the borrower gets a new contract that takes the place of the original agreement. Borrowers often choose to refinance when the interest-rate environment changes substantially, causing potential savings on debt payments from a new agreement.

Consumers generally seek to refinance certain debt obligations in order to obtain more favorable borrowing terms, often in response to shifting economic conditions. Common goals from refinancing are to lower one’s fixed interest rate to reduce payments over the life of the loan, to change the duration of the loan, or to switch from a fixed-rate mortgage to an adjustable-rate mortgage (ARM) or vice versa (in regard to mortgages in particular). Note that during a refinance of a consumer loan (auto, personal, etc.) there are typically no closing costs associated with the refinance process unlike most mortgage loans

Borrowers may also refinance because their credit profile has improved, because of changes made to their long-term financial plans, or to pay off their existing debts by consolidating them into one low-priced loan. Changing interest rates in the economy are moving factors that people look for when shopping around for places to refinance. There must be a new or existing loan for there to be a refinance.

There are several types of refinancing one could take advantage of for their financial situation. One such refinance is a rate/term refinance for a better rate and a more advantageous term for repayment. Another is a cash-out refinance when your auto has more value (commonly referred to as loan to value or LTV) to pull a certain amount of funding against the worth of the vehicle. Another is a cash-in refinance where an individual can place money down to get to their ideal payment, rate, or term. Lastly, one could go for a debt consolidation refinance to help put their payments under one roof and one easy payment.

There are many benefits to a refinance such as lower payments, rates, and terms. Additionally, there is the convenience of consolidation of payments and an influx of cash for cash-out refinancing requests. There are some drawbacks to a refinance. One such drawback is if there is a movement back to the original term there is more interest to be paid during the life of the loan, shortened terms may increase payment potentially as well. If interest rates drop, you won’t get the benefit with a fixed-rate mortgage unless you refinance again and you could lose equity in your home depending on the mortgage refinance.

Refinancing is a powerful tool that can benefit you in the long run if done correctly. During my time in finance, I have seen many practical applications of refinancing that people use to their advantage. Until the next time dear readers, excelsior!