Refinancing a mortgage or car loan can help lower your monthly payment by lowering your interest rate. It can also hurt your credit score but it should bounce back in the long run.
Refinancing a loan or mortgage can be a great way to access lower interest rates and lower your monthly payments. But it can also ding your credit score. So how do you weigh the pros and cons?
Let’s start by getting clear on the basic terms.
Refinancing involves taking out a new loan to pay off the debt of the original loan. This process can help you lower your interest rate and extend your loan term. (That’s the period of time you’ll agree to make payments to pay off the loan).
Refinancing can also be used to combine multiple loans into one new loan, offering the convenience of one streamlined payment, along with the advantage of a new lower interest rate.
Factors affecting credit scores.
Refinancing a mortgage can help lower your monthly payments, which may be your largest expenditure each month. That can free up your budget month after month.
If your refinancing moves you from an FHA-backed loan to a conventional loan, you might also get to drop (or even eliminate) your mortgage insurance premiums. That can lower your monthly payments too.
But here’s another big factor: when you refinance, you’ll probably incur closing costs, like origination fees or paying for a new appraisal. Fees and costs like these that commonly come with a refinanced mortgage can range between 2% to 6% of the total loan amount.
A mortgage refinance also involves extending the terms of your loan, so your monthly payments will go down, but you may pay more in interest over the long run.
If you're thinking about refinancing your car loan, make sure the new loan actually saves money.
Refinancing a car loan can be a good idea under the following conditions:
Yes! Personal loans can be refinanced. The goal should be to save money, with a new loan under a lower interest rate. After you refinance, you'll still owe the same amount of debt, but you’ll pay less in interest charges each month. While this lowers your monthly payment, you may pay more interest in the long run.
Refinancing always has pros and cons. Here are 4 simple steps for ensuring a smooth experience:
A healthy credit score can often lead to a lower interest rate on a refinanced loan. It’s worth working on your credit before applying -- and Bright can help boost almost any credit report.
Bright can pay off your credit cards faster, making smart payments for you, always on time and optimized to save you money. With more on-time payments and a lower utilization rate, Bright can improve your credit score automatically.
Bright doesn’t provide debt consolidation loans, but we do offer two other solutions, Bright Credit Builder and Bright Balance Transfers. They’re smart alternatives, with competitive rates and built-in automation.
Bright Credit Builder is an easy and safe way to boost your credit score - with instant approval, no extra fees and no credit check required. Once you’re signed up, we’ll set up an interest-free, secured line of credit and use it to make automatic payments on your cards, building a positive payment history and lowering your credit utilization. Bright Credit Builder focuses on utilization and payment history because as they improve, your credit score goes up!
Bright Balance Transfer offers a low-interest line of credit designed to pay off card debt fast while saving you from high interest charges. Once approved, Bright uses the funds from your Bright Balance Transfer to pay off your high-interest cards, moving those debts to our balance transfer program with its lower APR. Over the months ahead, Bright automates your new repayments, too, so you pay less in interest and it’s hassle-free. Bright Balance Transfers offers credit lines of up to $10,000 at APRs starting from 9.95%, depending on your eligibility.
If you don’t have it yet, download the Bright app from the App Store or Google Play. Connect your checking account and your cards, set a few goals and let Bright get to work. Once you sign up, you can apply for Bright Credit Builder or Bright Balance Transfer or use MoneyScience™ to pay off your cards fast.
With a postgraduate degree in commerce from The University of Sydney, Pranay has his finger on the pulse of the finance industry. Breaking down complex financial concepts is his forte.