What Does it Mean to Refinance a Loan?
Owning a home or car opens the door to several financing options. And if you got stuck with a bad loan deal when applying for your original loan, there's always the option of refinancing the mortgage loan, or vehicle loan, and attempting to get a loan with more desirable terms.
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Definition
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Refinancing is a term used to describe replacing your present loan with a new one. There's the option of using your existing lender to refinance a loan, or you can speak with a new loan company altogether and use them as your new finance company. After receiving an approval, the new loan pays off the previous one, and you start making monthly payments to your new lender.
Purpose
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The majority of people refinance in order to get new terms on the loan, and ultimately reduce their interest rate and monthly payments. Most loans, especially mortgage and auto loans, feature a fixed rate that doesn't change during the life of the loan. Being assigned a high interest rate in the beginning can mean higher payments for the duration of the loan. By means of a refinance, you can take advantage of lower rates and enjoy a smaller monthly payment.
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Qualifying
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The downside of refinancing is re-qualifying for a loan. Lenders have to re-evaluate your income and credit score to see if you still qualify for a loan. Qualifications vary, depending on the type of loan. However, maintaining a high credit score (680 or above) and being able to provide proof of adequate income can help you qualify for a refinance. To help ensure an approval, it's wise to talk with lenders beforehand and inquire about loan requirements.
Considerations
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Lenders do impose certain limits with regards to refinancing. As a rule, refinancing a mortgage loan or auto loan requires some level of equity, and these lenders won't renew your mortgage or auto loan if you owe more than the property's worth. To assess the value, lenders will request an appraisal of the property. What's more, mortgage refinances involve extra fees such as closing costs, which are paid by owners before signing the new home loan documents.
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