Loan Refinancing – What is Loan Refinancing?

Refinancing essentially means taking out a new loan for the amount you owe, often with lower interest rates and better terms. The resulting lower monthly payments could save you money, but be sure to examine the specifications of your new loan carefully.


People refinance loans to take advantage of lower interest rates, reduce monthly payment amounts, change the loan term or consolidate debt. It can also help you avoid paying prepayment penalties and fees.

1. Lower Interest Rates

Loan refinancing allows borrowers to replace their current credit agreements with new ones that may have more favorable borrowing terms. Borrowers often seek to refinance mortgage loans, car loans, and student debt to obtain lower interest rates or better repayment terms that may save them money in the long run. Many factors influence interest rates, including national monetary policy, economic trends, and market competition. Borrowers who are a decade or more into their mortgages may not see significant savings from a drop in rates because they would have to spread their remaining payoff period over a longer loan term.

When refinancing a mortgage, borrowers are able to choose whether or not to purchase discount points. This can reduce the amount of upfront closing costs but increases the total interest paid over time. It’s important to consider this cost versus the amount of money saved before choosing to refinance.

When refinancing unsecured debt, it’s possible to qualify for a new loan with a better interest rate based on your current financial profile and lender’s credit criteria. Lenders will typically run a soft credit inquiry, which does not negatively impact your score, before providing you with a prequalification offer. From there, you can compare offers from different lenders and determine whether or not a refinance loan is right for you.

2. Consolidate Your Debt

When you consolidate debt, you combine multiple loan balances into a single payment. This can help you manage your debt repayment efforts and become debt-free faster. Debt consolidation can be done with a mortgage, home equity loan or a personal loan. Mortgage refinancing is a popular option for debt consolidation because of historically low mortgage rates. However, it is important to remember that debt consolidation does not wipe out your original debt, but simply transfers it into a new loan with a lower interest rate.

For example, if you have multiple credit card debts with high interest rates, it can be difficult to keep up with the minimum monthly payments and pay off your credit cards. By refinancing those debts into a mortgage with a lower interest rate, you can lower your monthly payments and make them easier to manage.

To qualify for a mortgage to consolidate your debt, you must have sufficient equity in your home. This can be determined through a home appraisal, which your lender will require before approving the refinance. Lenders will also consider your credit history, income and debt-to-income ratio when assessing your application. The lender will then send you checks directly to your creditors for the amount of money owed, which will include a check for the principal and a check for the interest.

3. Streamline Your Payments

If you have a loan that is nearing the end of its repayment timeline, then refinancing might help you reduce your overall debt payments. However, it’s important to keep in mind that refinancing will extend your total loan period, which could result in higher interest charges over time.

Refinance lenders may also offer flexible repayment terms that let you choose a longer or shorter repayment term than your original loan. This allows you to lower your monthly payment while still giving you the breathing room you need to manage other financial obligations and expenses.

Streamline refinance loans are available through mortgage programs like the FHA, VA and USDA, which offer minimal underwriting requirements. This is particularly beneficial for borrowers who have bad credit.

To determine whether or not a refinance is right for you, consider your current loan payment schedule and your debt-to-income ratio. It’s also important to know the amount of money you will need to pay off your existing loan before pursuing a refinance, as well as any prepayment penalties that might apply. To find out this information, log into your personal loan account or contact your lender directly to obtain the payoff balance and any outstanding payout fees that may be applied.

4. Change Your Loan Terms

Refinancing involves replacing your existing loan with a new one, which often comes with different terms than the original. This enables borrowers to redo their loan agreement for better financial footing. This process may help borrowers lower their interest rate, reduce monthly mortgage payments, access equity or change their loan type. Most consumer lenders offer refinancing options for loans like credit cards, mortgages and car loans.

A borrower’s creditworthiness plays a role in how long the term of their loan is and whether they are able to qualify for a particular loan type. As such, a borrower’s refinance options will be limited by their credit score, income and savings, as well as any outstanding debt they have.

Extending a loan term can result in higher total interest costs, as the additional time the loan spends accruing interest can add up. This is often a concern for borrowers who want to pay off their loan faster. However, longer loan terms may also make monthly payments feel more manageable for struggling borrowers.

While there are several benefits to refinancing, it’s important that borrowers consider their personal situation before making the decision. Refinancing typically requires a hard inquiry on the credit report, which can lower the credit score temporarily. Fortunately, making on-time payments on the new loan will improve the credit score over time.