Did you know that the average American is over $90,000 in debt? This debt comes from common essentials like home loans and car loans. However, it also includes hospital bills, student loans, personal loans, credit cards, and more.
While your ultimate goal should be paying off your debt, this can take time. In the meanwhile, you could be struggling to pay your bills. Conversely, you might just be tired of paying exorbitant interest rates.
In either case, refinancing your home or car could prove beneficial. But is refinancing worth it?
We’ll let you be the judge. Let’s take an in-depth look at how refinancing works, as well as the pros and cons of following through with it.
How Does Refinancing Work?
Let’s examine the process of refinancing a home loan or car loan before we seek to answer the question “Is refinancing worth it?”
First, you need to talk to the bank that the loan is held through. In the case of a home loan, it will probably be a mortgage company.
Find out if it’s possible to refinance your loan. If you can’t refinance the loan, it can be for several reasons, such as:
- Your credit score isn’t high enough
- Your debt to income ratio is too high
- You’re upside down on the loan (you owe more than what the car/home is worth)
- Your current loan has a prepayment penalty
- You have a lien against the car or home
Assuming you are allowed to refinance your car or home, you can go about it in several different ways. First, you can refinance through the same lender for a better interest rate. Alternatively, you can shop around for another lender who will take over your loan for an even better rate.
What Are the Benefits of Refinancing
Is refinancing worth it? To answer this question, let’s talk about the benefits of refinancing your home or car loan.
Currently, 54% of Americans are living paycheck to paycheck. This is often because we borrow too much money and fall behind on payments. Refinancing can help you save money and get back on track with your finances.
Did you know that you can refinance your home using the positive equity to absorb your other debts? But how does refinancing homework in terms of debt consolidation?
Provided you can get approved, refinancing your home for its current market value can put tens of thousands of dollars in your pocket. For example, if your home is worth $275,000 but you only owe $200,000, you can refinance for the extra $75K.
However, if you’re refinancing for debt consolidation, you’ll be held accountable for what you do with that money. The upside is, you can absorb $75K worth of high-interest debts under your new mortgage. Additionally, your credit score will improve significantly.
Save Money on Lower Payments and Lower Interest Rates
Most people choose to refinance a car or a home because it will ultimately save them money. You can refinance a car to get a lower interest rate based on your improved credit score.
You can also choose a new loan term. You can choose a shorter loan to pay the car off faster or a longer term to reduce your monthly payments.
If you refinance your home to absorb your other debts, refinancing can help you save a ton of money. By consolidating your other debts under your new mortgage, you’ll get rid of high-interest rates from credit cards, personal loans, etc.
Furthermore, there will only be one payment regarding those debts – your new mortgage. Rather than paying all of those debts individually, you’ll only have one payment to make. This can substantially reduce your monthly expenses.
Finance a Large Purchase
Finally, some people choose to refinance their homes in order to finance a large purchase, home renovation, or business startup. If you have a reasonable amount of equity in your home, you can refinance your home and cash out on the equity.
Then, you can use this money to buy recreational equipment, update your kitchen, add on to your home, etc. The will be certain limitations on how much equity you can pull out and your new interest rate based on your credit score.
What Are the Downsides of Refinancing?
With any financial decision, there are both pros and cons. In respect to fairness, we now need to look at the downsides of refinancing to help you answer the question “Is refinancing worth it?”
Renewed Loan Terms
As we’ve suggested already, when you refinance a car or home, your loan terms are renewed. In most cases, you can choose the terms.
However, this can be a bad thing if you only had 10 years left on your mortgage and you refinance for another 20 or 30 years. Similarly, refinancing on a car for lower monthly payments could extend your loan another three to five years.
While this may not seem like a big deal, making interest payments for a longer period of time can result in more money paid into the loan, even if it has a lower rate.
Your Debt Doesn’t Disappear
Lastly, if you’re trying to decide, “Is refinancing worth it to consolidate debt?” you need to understand something. Your debt doesn’t just go away. While your new mortgage will absorb those debts and you won’t owe the same lenders, you’re still liable for the same amount of money.
As noted earlier, debt consolidation can improve your credit score. You’ll have fewer debts and a lower debt to income ratio.
However, if you don’t have a lot of discipline, this provides an avenue to further indebtedness. You’ll become eligible for more loans and credit cards, which could land you deeper in debt.
Is Refinancing Worth It to You?
What do you think? Is refinancing worth it?
If done responsibly, refinancing can help you save money while simultaneously boosting your credit score. However, if you refinance and make poor decisions, you can end up further in debt. Choose wisely.
For more financial tips or investing advice, you’re in the right place. Before you go, take a look through some of our other articles to find the information you need to make good decisions.