Higher prices on everyday goods and services are forcing households to reassess their finances and find new ways to save money. While eating out less and canceling unnecessary subscriptions are excellent ways to temper spending, another option might have an even greater impact on your budget — refinancing debts to a lower interest rate. When you refinance, a new loan is used to pay off existing debt.
Here are five reasons to consider submitting a refinance application today.
- Interest rates are on the rise.
In 2022, the Federal Reserve plans to raise rates seven times. Rate increases result in higher borrowing costs for new homeowners and auto buyers, and no one knows when rates will reverse course. Securing a loan before the next rate increase could help ensure you pay fewer interest charges over the life of the loan.
- You need lower monthly payments.
Since a refinance involves the creation of a new loan, you can select repayment terms longer or shorter than your existing loan. A longer repayment term typically translates to smaller monthly payments, which create breathing room in your budget.
Locking in a refinance for a shorter term can also provide benefits. While a shorter repayment term often results in higher payments, it can produce greater cost savings. Borrowers who choose longer repayment periods pay more interest unless they pay off the loan early.
- Your current rate is higher than the best available rate.
If your mortgage, auto, or personal loan’s interest rate is higher than the lowest interest rates offered by financial institutions, it might be a good time to refinance. While your credit score, household income, and other lender requirements determine loan eligibility, applying could lead to an approval at a lower interest rate.
- It could help you achieve other financial goals.
Eligible homeowners can refinance their mortgage and receive cash back at closing. A cash-out refinance allows you to secure a new loan for more than the mortgage balance and use the extra funds to pay off high-interest-rate debt, set money aside for an emergency, or meet another financial need.
- Your credit score has improved.
Lenders and creditors look to credit scores as a reliable way to assess the risk of approving a loan. The higher the score, the lower the perceived risk to the lender. Since low-risk borrowers are believed to be more likely to repay loans, they are often offered the most favorable interest rates and repayment terms. Refinancing could save you money if your credit score has improved since you originally took out your loan.
Other Considerations
As with other types of borrowing, you may need to pay closing costs to refinance a loan. Use HawaiiUSA’s Time to Refinance calculator to discover how long it would take to recoup closing costs and break even when refinancing a loan. You can experience the cost savings from a refinance after you’ve recovered the costs of taking out the loan.
Let’s say closing costs on your refinance total $1,500. If the new loan payment results in a $300 monthly savings, it takes only five months to recoup your costs. At month six and beyond, you can count the $300 as pure savings!
Keep more cash in your account by lowering your borrowing costs. Contact us today to see if you can experience lower monthly payments and interest savings by refinancing your mortgage, auto loan, or both.
