No matter how well organized and careful you are with your finances, unpleasant surprises can happen. For example, you may need money to repair your car or undergo a minor dental intervention. But you don’t have enough money for that.

That’s how borrowing money has become a common way for people with regular incomes to solve financial problems or afford something they can’t either way. Simply, sometimes your income and savings aren’t enough. 

Thus, many lenders operate on the market and offer a huge range of financial products for almost everyone’s needs. They also offer a variety of refinancing loans (check definisjon), which you may need later. 

Why People Borrow Money

You can take out a loan for various reasons, and most often, it is for buying a house, car, or some big-ticket item. You can also rely on them when it comes to various types of emergencies, from home upgrades to car repairs. 

Also, these financial arrangements come in handy when you have bills to pay or debt to consolidate. Sudden expenses like medical, dental, or vet emergencies can also pop up out of nowhere. And very often, you can take on a loan if you want to treat yourself to something like going on a dream vacation.

When you take out a loan for the first time, you agree to certain conditions that the lender determines. They most often concern the interest rate at which you borrow money and the length of debt repayment. Also, lending terms will depend on you because lenders check your creditworthiness. The more trustworthy you are, the better lending terms you can get.

At some point, you may realize that the current loan burdens you too much. Or maybe you get a raise and can pay off the loan quickly. Perhaps your credit score has improved, so you can finally apply for more favorable loans. These are all valid reasons why you should consider refinancing to get your finances in order.

What Is Refinancing?

Refinancing is when you decide to replace one type of loan with another. But you can’t do it just like that. In fact, there must be a valid reason for this decision. People generally decide to refinance when a better and more favorable opportunity pops up or when the current payments have become too much of a burden.

Almost all loans can be replaced with another, whether they are short-term or long-term. Also, refinance loans will work for both secured and unsecured loans. You can apply for these financial arrangements with lenders who approved the initial loan. But you’re also free to apply for a refinance loan with other financial institutions if their offers are favorable.

Refinancing comes in handy when, for example, you want to finally get rid of the student loan you’ve been carrying for years. You’ve got a well-paying job, so you can repay this debt faster and thus improve your credit score and create space for another, more favorable loans.

Also, refinancing a mortgage can be a lifesaver. If you can, you should decide to replace your variable-rate mortgage with a loan with fixed interest. Also, you should refinance if that can reduce your repayment term, for example, from 30 to 15 years.

When It’s Time to Refinance Your Loan

If you make it at the right moment, refinancing an existing mortgage, loan, or several of them can be the smartest decision you’ve ever made. There are times when refinancing is more than welcome, and it’s up to you to decide if that applies to your situation.

Interest Rates Drop

For example, why not take advantage of the period of low-interest rates, and further reduce your installment? Global interest rates don’t drop so often, but these situations do happen. This event affects APRs related to refinance loans a lot, so their overall cost goes down. So, if the moment is favorable, refinancing should be done when interest rates are falling.

Your Finances Improves

Another reason to refinance existing loans is that your financial situation gets better. Maybe you’ve got a raise, found a side gig, got a better-paying job, or settled some debts and card balance in the meantime. All these things can boost your credit score and make your finance flourish.

In the eyes of the lender, you’re now a worthwhile candidate for a refinance loan. That gives you an excellent position in negotiations for favorable lending terms. If approved, you can replace the existing loan with another, much more favorable one. That can help you save a lot of money during the loan lifetime.

You Can Go from Variable to Fixed Interest

Another valid reason for refinancing is when you have a chance to replace the variable interest loan with one with fixed rates. That means that your installment will remain the same throughout the repayment period. That brings security and saves you money since the future is quite uncertain. There will always be more chances that interest rates will rise in the future and not fall.

When Refinancing Isn’t a Good Idea

In addition to all the mentioned advantages of refinancing, it’s good to know a few things about its downsides. Better said, there are situations when replacing a loan with another is not a very wise decision. 

So you shouldn’t simply strive for refinancing at all costs but wait for a more favorable moment, or simply opt for alternatives that give you access to cash, like credit cards with 0% APR or personal loans. Meanwhile, here’s when refinancing is a no-no.

You Need Cash

For starters, you should never refinance debt just because you need the money. Thus, you can make a huge mistake and take a significantly less favorable loan, which only seems attractive. That’s a beginner’s mistake for most borrowers.

For example, lenders offer you a cash-out refinance with which you will replace your current debt and also get some extra money to spend as you wish. However, its interest is higher by 1.5 points. So is it really worth taking money for some non-urgent expenses if your installment goes up and the loan tenure remains the same or even extends? We don’t think so.

You Get Nothing

As we have already said, refinancing is helpful if it brings some benefit to borrowers. These can be lower installments and an extended repayment if their financial situation has worsened or shortening the repayment term with increased installments but lower interest rates. That latter is handy when borrowers can afford higher payments and thus get rid of the debt as soon as possible.

What matters here is the so-called break-even point. That’s a moment in loan repayment when refi makes sense, that is, when the costs of refinancing become equal to the savings you could achieve with this new loan. 

There’s no rule of thumb for when the break-even point is. You just have to do the math to figure out when that happens or use handy online tools to calculate it. You can check out this link to help you determine the break-even point.

How to Choose a Lender for Refinancing Loan

The first step toward refinancing is checking out the loan offer. You’ll start with your lenders, as there’s a high chance of approval as you’re already a client, so you might enjoy some perks. But you’re free to look around for even better deals. That way, you can lurk for the most affordable rates and better lending terms. 

So don’t restrict yourself to a single lender – feel free to ask for quotes from banks, credit unions, and other types of lenders. Then, you should shortlist no more than five different lenders and their refinancing offers. Remember to select only lenders with a great reputation, a proven track record, and many happy clients.

Remember to be careful with multiple loan applications at once, as these can be a hard inquiry on your credit score. Instead, look for lenders who’ll do only a brief check and get you preapproval based on some basic information. That can help you make a final decision on which refinance loan suits you best.

The definition of refinance loans is clear, but many other things related to them aren’t. So you should never rush with the decision of replacing one loan with another. Instead, take your time to investigate your options and weigh in pros and cons of refinancing.