Mortgage Refinances

Advantages When You Refinance a Loan

Although a new loan might lack attractive features of an existing loan, refinancing has several potential benefits:

Lower your interest rates. A common reason for refinancing is to lower financing costs; to do so, you typically need to refinance into a loan with an interest rate that is lower than your existing rate by qualifying for a lower rate based on market conditions or an improved credit score. Lower interest rates typically result in lower interest costs and significant savings over the life of the loan, especially with large or long-term loans.4

• Change the loan term. While you can extend repayment to increase the term of the loan (but potentially pay more in interest costs), you also can refinance into a shorter-term loan. For example, you might want to refinance a 30-year home loan into a 15-year home loan that comes with higher monthly payments but a lower interest rate.
• Consolidate debts. If you have multiple loans, it might make sense to consolidate them into a single loan, especially if you can get a lower interest rate. One loan makes it easier to keep track of payments.10
• Change your loan type. If you have a variable-rate loan that causes your monthly payments to fluctuate as interest rates change, you might prefer to switch to a loan at a fixed rate. A fixed-rate loan offers protection if rates are currently low but are expected to rise and results in predictable monthly payments.11
• Lower your monthly payments. Whether you lower the interest rate on your loan or extend the amount of time you’ll take to repay it, your new loan balance will most likely be smaller than your original loan balance because you will have lower interest costs or more time to repay. The new monthly payment should decrease as a result.12 The outcome is often a healthier monthly cash flow and more money available in the budget for other essential monthly expenses.2
• Pay off a loan that’s due. Some loans, particularly balloon loans, have to be repaid on a specific date, but you might not have the funds available for a large lump-sum payment.13 In those cases, it might make sense to refinance the loan using a new loan to fund the balloon payment in order to gain more time to pay off the debt. For example, some business loans are due after just a few years but can be refinanced into longer-term debt after the business has established itself and shown a history of making on-time payments.