Money Tips: Should You Refinance Your Loan?

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With the way the interest rates are dropping in our economy, many individuals are looking to refinance their loans for a better rate and lower payments.  I've heard a couple of my friends offering up their experiences with refinancing, and decided to look further into exactly what it is and if it is beneficial.

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What is refinancing?
Refinancing is when you finance something again.  This typically applies of loans, where you refinance them at a lower rate of interest than you initially had.  During refinancing, the initial loan is paid off so that the new loan can be instated.

Who is best eligible for refinancing?
Typically borrowers with high credit scores have better experiences with refinancing.  Borrowers with not so good credit or even too much debt may be taking a risk with refinancing.

What are the advantages of refinancing?
The best and most sought out advantage is a lower interest rate on the loan.  Considering many of us do no have established credit in college, once we are making more money in our established careers, we are able to pay our bills in a more timely fashion increasing our credit score.  In turn, this will impress creditors and interest rates can drop, saving us more hundreds of dollars a year off of interest rates alone.

For those who have homes and have had them for a while, you could refinance for large purchases - such as cars or to reduce debt incurred from credit cards over the years.  Borrowers are given a lump sum of cash calculated by what the appraisal value of the house is now (what the loaner will loan based off of this appraisal) less the amount already paid on the home.  Since many people do home improvements, they typically get a good cash out.

What are the disadvantages/risks of refinancing?
The hidden fees could be a major disadvantage.  It is best to check all paperwork before filing for refinancing as the companies that issued the loans could have included penalty fees for those deciding to do this.  Additionally, having an attorney on hand to check over your paper work or even having bank fees could be major money busters.  The fees themselves could be the very deterrent you face when refinancing.

Wait until banks offer free financing or have very low fees associated with this process.  It could save you thousands of dollars.

So, should you refinance?  The decision is purely based off of your current situation.  Refinancing with your original loaner could be an option and save you tons of money.  Likewise, using another lending company could give way to the same benefits or could hurt your more than help.  Consult with a financial advisor for better instructions.

For now, I'm good on refinancing.

Have you refinanced your house/car?  How was the process?

Additional Reading:

Should You Refinance?  When It Makes Sense

Beginner's Guide to Refinancing Your Mortgage

Auto Refinance: Risk and Benefits