When to Consider Refinancing a Loan?

refi home laon blogThis article is courtesy of our friends at NerdWallet.

If you’re making payments on a mortgage or personal loan, you might be wondering whether it’s worthwhile to refinance. Refinancing, or replacing your loan with a new one with different terms, is a big move that requires some homework. Here are some important things to consider.

Define your goal

People refinance for many reasons. You might be interested in lowering the monthly payments to gain breathing room in your budget. Or your goal could be to pay less in total over the life of the loan. Some consumers refinance to replace a variable-rate loan with a fixed-rate one. Some nonprofit credit unions, like Wauna Credit Union, offer loans and mortgages to their members at attractive interest rates.

Homeowners may do a cash-out refinancing, getting a larger loan and taking some money out, in order to consolidate other loans or pay for home improvements. Others might refinance a Federal Housing Administration (FHA) loan to a conventional loan to save money on mortgage insurance. And some refinance for personal reasons, like adding a spouse to a mortgage or settling a divorce.

Check your credit

Your credit score is an indicator of how likely you are to pay back a loan, and lenders use it to determine how much they’ll charge you to borrow. Younger borrowers often don’t have long credit histories, and they end up paying higher rates as a result; a recent NerdWallet study found that millennials have the lowest average credit score of all age groups. But if you’ve had a loan for a year or more and have been making timely payments, it could be that your credit score has gone up enough to let you qualify for a lower-rate loan.

You can get a free copy of your credit report at AnnualCreditReport.com. That will allow you to correct inaccuracies that can hurt your credit score. Then, purchase your credit score from the credit reporting agencies for a small fee to see where you stand. Some credit card companies show a credit score on your monthly statement.

Add up any fees

When deciding whether to refi, factor in any fees and closing costs. The cost to refinance a personal loan may be minimal, but if you’ve obtained a mortgage in the past, you know that home loans can be expensive. Application fees, appraisal fees, legal fees and other closing costs could add up to 3 percent of the loan amount or more. And if your loan agreement has prepayment penalties, that could make a refi less attractive.

Refinancing can be smart option, whether your goal is to lower your monthly payments, save on the overall cost of borrowing or lock in a fixed interest rate. As always, it’s important to do your research to make sure that you’re getting a good deal.

Jeanne Lee, NerdWallet

© Copyright 2015 NerdWallet, Inc. All Rights Reserved

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