Which Loans Should I Refinance Right Now?
Falling interest rates can present a savings opportunity to borrowers, who may view it as a good time to review their loans and see which ones can be refinanced. However, while rates may be at historic lows, your personal circumstances are important. Your credit scores, income and outstanding debts can all influence the rate that lenders will offer, and should be considered when planning your finances.
Reasons to Refinance a Loan
Refinancing replaces your current loan with a new loan. It doesn't decrease how much debt you owe, but can benefit you in several ways. It can:
- Lower your interest rate to save you money
- Lower your monthly payment to free up cash
- Switch you from a variable-rate loan to a fixed-rate loan
Each benefit can be helpful in its own way, and sometimes you may be able to take advantage of more than one. However, you also want to review your current loan arrangements before refinancing.
Because you're paying off your current loan with a new loan, you may lose any interest rate discounts or other benefits your current lender offers. Take this into consideration when deciding which loans to refinance.
Is It Time to Refinance Your Mortgage?
For homeowners, refinancing a mortgage can be particularly appealing. The large loan amount means even a small change in your interest rate can lead to significant changes in your monthly payment that add up to a lot of savings in the long run.
Even if you got a mortgage or refinanced a mortgage last year, further rate drops stemming from the Fed's response to the economic turmoil caused by COVID-19 means it's worth taking another look. With mortgage refinancing, however, closing costs can limit your savings. And if you plan on moving soon, refinancing may actually wind up costing you more than you'll save.
Consider your mortgage's current balance and see how much you'd pay if the closing costs set you back the typical 2% to 5% of the loan amount. For example, you may pay $4,000 to $10,000 on your $200,000 mortgage balance. If refinancing with a lower rate saves you $100 a month, it will take 40 to 100 months to break even. If you stay in the home and stick with the same mortgage for longer than that, you could save money.
The closing costs and savings can depend on the lender, interest rates and your creditworthiness, so shop around to see if you can find a good deal and if the numbers add up.
Even if it doesn't lead to significant savings, you may also want to consider refinancing an adjustable-rate mortgage with a fixed-rate mortgage. Although the fixed rate may be higher than today's adjustable rate, locking in a low rate could be helpful when interest rates climb again.
Consider Refinancing Auto Loans
Figuring out if refinancing an auto loan makes sense will be easier than the mortgage calculation because auto loans generally don't require closing costs or origination fees. If you can qualify for a lower interest rate than your current loan, refinancing an auto loan probably makes sense. But there are a few caveats.
If your current auto loan has a prepayment penalty, consider the extra expense and compare it to the potential savings.
Also, run the numbers if you're thinking about refinancing with a loan that has a longer repayment term. You may wind up with a lower monthly payment but pay more interest overall. That's not necessarily a bad thing if you need the extra money today, but know what you're getting into before signing a contract.
To learn more about the potential savings you can realize by refinancing, explore your auto loan refinancing options with Experian partner RateGenius.
Think About Refinancing Private Student Loans
When it comes to student loans, there's more at play than the interest rate and monthly payment. Many borrowers have federal student loans, which come with special repayment and forgiveness programs, including paused payments and 0% interest on federally held loans in response to the coronavirus pandemic.
Federal student loans are also eligible for income-driven repayment plans, which you can switch to for free and can lead to lower payments based on your income. But if you refinance your student loans, you'll need to do so with a private student loan.
Private lenders may offer some benefits, but your loans will no longer be eligible for the federal repayment, forgiveness or special programs. Refinancing may be a good idea if you can lower your interest rate and save money, but you may want to build your emergency fund and feel confident about your employment before refinancing.
How Does Refinancing Affect Your Credit?
Refinancing an installment loan (such as a mortgage, auto or student loan) can impact your credit in several ways, but it generally won't have a major effect:
- New hard inquiries: Applying for a new loan can lead to a hard inquiry, which may temporarily hurt your scores a little. Multiple hard inquiries can also increase the impact; however, you can shop for the best offer before accepting a loan. Credit scoring models will generally combine multiple hard inquiries for a single loan type, such as a mortgage, auto or student loan, if the inquiries all happen within a 14-day period (some credit scoring models give you up to 45 days).
- A new account: Your loan will be a new account, which will lower the average age of accounts on your credit report. This is a minor factor in your credit scores but still may hurt your credit a little.
Refinancing can also help your credit in the long run if it makes your payments more affordable, which can make it easier to afford all your payments on time in the future. Also, as you repay your loan with on-time payments, those payments can contribute toward your positive credit history.
Start With a Credit Check
Lower interest rates can be a good prompt to see if refinancing your loans makes sense. However, your creditworthiness will impact your ability to get the lowest possible rate. You may want to check your credit as a first step when researching any type of refinancing, and you can do so with a free Experian account. You'll also receive free credit monitoring, a credit score tracker and plenty of other helpful features.