Flash back to high school English class: It was none other than Geoffrey Chaucer who first coined the phrase that all good things must come to an end. Whether it's that long, relaxing vacation, or just a sale on your favorite brand of coffee at the grocery store, the perks of life don't last forever. In 2022, we’ll likely say goodbye to the historically low interest rates enjoyed by anyone who took out a loan recently.
The Fed (formally known as the Federal Reserve) at their upcoming meetings will likely increase the prime interest lending rate, which determines the interest rate other lenders set for their rates. When this happens, you can expect any variable interest rate to increase, whether your current lender is bank, credit union, credit card company, or mortgage lender.
Bottom line: You're going to pay more for the money you borrow.
Cheer up — there's good news in the midst of all the economic blahs. You still have a window of time to lock in those low, low rates by refinancing any debt that relies on a variable rate, or any loans that originated more than two years ago when rates were less appealing than they are now. Yes, that may sound like a lot of adult homework, but understanding where you can go to get started on securing a fixed rate that you can keep after those rates start inching upwards may help you keep this one good thing from coming to an end.
Choosing a refinancing lender
If you search "refinance" on Google, you're likely going to be offered more ads than facts. A lot depends on what type of lender you’re looking at: megabanks, online lenders, remember-your-face places like a credit union, or even neobanks like Chime all flash their shiny refinance loan in front of you to catch your attention. How and where do you get started?
Your gut is probably telling you to just find the lowest interest rate. Your daily life of schedules and family commitments is probably urging you to find whatever place can get your loan processed quickly and with the least amount of paperwork. Yes, you want to make sure you get those low rates, and nobody wants more paperwork than is necessary, but there are lots of factors and choices to consider when refinancing. Taking your time rather than choosing the quick-and-dirty, low-and-go loan refinancing offers you’ll find in paid search ads will most likely save you money down the road.
Why not start with the Fed — after all, that's where the base interest rate begins. The Fed offers a Consumer's Guide to Mortgage Refinancing, but many of the principles apply to personal debt, including vehicle loans, student loan debt, and your home mortgage. Understanding the process may alert you to questions you didn't think to ask.
Above all else, it's helpful to know that you are basically swapping out your current loan, whether it's a mortgage or a loan from your credit card company, for a new loan. Any financial institution handing over its money to you at its most attractive rate will want to make sure of a few of the nitty gritty details about you and your ability to repay your debts.
Let's start where you already bank. Reach out to your lender and find out its current mortgage rate, auto refinance rate, or personal loan interest rate. As you’re an existing customer, your current bank or credit union may be more inclined to work with you on both the interest rate, and the overall loan process. They may see your direct deposits and do a "soft pull" of your credit — a sneak peek that does not impact your credit score. They might even already know your credit score, and may be willing to waive refinancing fees to keep your loan business.
If you think you’ll have a lot of questions along the way, it may work to your advantage to partner with a financial institution where you will have a dedicated loan officer. With larger banks and neobanks, you may be assigned to a team, or even a general customer support phone number. Keep in mind both the level of service you want during the refinance loan application process and the loan repayment process.
If you do not have a primary financial institution, or you currently manage your money through an online-only service and want to consider a more personal option to help you through the refinance process, we recommend finding a community bank or credit union to guide you. The upsides of a local financial institution extend far beyond the financial relationship you develop. Often you can find a lender whose values align with yours.
Factors to consider before refinancing
Aside from a possible refinance rate being incredibly low and incredibly attractive, there is another major consideration: Is refinancing right now a good idea for you? Yes, from an interest rate perspective, the idea of improving your loan term may be appealing. But the goal of refinancing is not only to streamline your monthly payment, but also to improve your overall financial position.
If you’re paying on a home loan or an auto loan, are well invested, and nearing the end of your loan, starting over with a new loan (again, a refinanced loan is just a new loan in the amount of what is still outstanding in your existing loan) may leave you paying more in interest than you are building in equity.
Likewise, if you will incur a prepayment penalty for paying off your original loan early, you might want to either negotiate with your existing bank or credit union to have the fee waived, or reconsider if refinancing will save you enough money compared to the penalty. An origination fee might also be incurred, but again, a motivated refinance lender eager to have you as its borrower may be able to help manage these expenses.
On the flip side, if you've recently borrowed money and your credit score is still adjusting from the initial loan, or a recent expansion of your credit utilization ratio, you may not have much to gain from a new loan. You might not even qualify for one. Timing is everything, as they say, and now might not be the right time for you personally, even if a lower interest rate sounds tempting. Want to know why and when to refinance a loan? Insights about the best times and reason to refinance auto loans, can also apply to personal loans, signature loans, and credit card loans.
Certainly, there are plenty of benefits to refinancing depending on the loan type. Taking out a personal loan for debt consolidation may allow you to lock in a fixed rate rather than being tied to the variable interest rate of your credit card loan. If you are locked into a private student loan with a financial institution that made sense when you started college, but is less appealing now that you are graduated and working to pay it off, student loan refinancing might also be possible. This may depend on your income source, and having a conversation with your loan officer may help you clarify your options.
Whether you are looking to reduce your monthly mortgage payment, learn more about student loan refinance options, or just want to improve your loan term while the good rates last, knowing all the pluses and minuses up front may help you find the smartest way to borrow.
Refinancing mortgages versus personal debt
Refinancing your existing mortgage may offer you an improved loan option when you are looking down the road at the next two decades of your monthly mortgage payment, but the dollars and cents up front may prove daunting in the here and now. The prospect of a new mortgage when the memories of the original mortgage loan process are still tingling in the back of your mind may be a good reason to speak with a mortgage refinance lender who can help you determine if refinancing would benefit you, and what may be expected of you to make it happen.
Closing costs might be one aspect of the upfront cost, in addition to the prepayment penalty and origination fee already mentioned. However, if you have made improvements to the property, recently cleared a home equity loan, or improved your credit score, mortgage refinancing may be worth the legwork to improve your long-term finances. It's certainly worth inquiring, especially if you are trying to lock in a lower interest rate.
If you have a VA loan or an FHA loan, there may be specific guidelines that impact your mortgage refinancing options, and it is best to speak with a mortgage refinance lender that specifically handles each loan type.
If you are currently in an adjustable rate mortgage, you ultimately will see your payments rise, and not because you are increasing the equity in your home. Getting yourself into a fixed rate mortgage now may be the worth the effort and within a year, you will be able to appreciate a much more appealing position. With a home, you are always sitting in the position of having a secured loan with a valuable asset in hand at the end of your mortgage.
Most personal loans are unsecured, however, which means there is no tangible property, such as a house or car, at stake for the lender to accept as collateral. A personal loan depends mainly on your good credit score. You can still refinance both secured and unsecured loans, but you'll find the interest rates for unsecured loans to be higher than secured loans, simply because the lender is taking a slightly higher risk since there is nothing to back up the loan.
If you've ever transferred a balance to a new credit card because it offers you a newer, low introductory rate, you've basically refinanced your credit card loan at a lower rate. Your credit score will take a hit because you've just extended the total amount you have available to borrow against. Also, your credit score improves the longer the loan is open and in good standing, so your new credit card impacts your credit as well.
The same is true if you refinance a personal loan, an auto loan, or even a mortgage loan, but with those loans you also close out the original loan and you, most likely, refinance your new loan at a fixed rate (hopefully a lower one). There are similarities in how various types of loans are refinanced, but the goal of lowering your interest rate and shortening the overall loan term make both types of refi worth considering. A financial institution that focuses on service will be able to answer your questions, including helping you decide if refinancing your debt is to your advantage in the long run before you get too deep into the process.
Where to find the right refinancing lender near you
You probably won't have to look too hard to find a place willing to lend you money. The key to finding the right place is how willing they are to help you. Keep in mind that big banks are rarely concerned with what best suits your needs; they’re concerned with what best suits the needs of managing millions of borrowers. (Translation: You are not their highest priority.) Megabanks would often rather serve and woo a large corporation than spend time understanding your home refinance.
Online lenders certainly have made borrowing money quicker and easier, and who doesn't love anything quick and easy? Let's hope contacting their toll-free phone rep when you need help is also quick and easy. Of course, when you do, that will be the one time they happen to be experiencing unusually high call volume. While no one wants the process to be tedious, choosing a lender who is as quick and efficient when you've been paying on your loan for a year is just as important as how quickly they push you through the process.
As we mentioned, borrowing money where you already bank can help you save on some of the fees typically associated with a new loan, so definitely consider whether your current financial institution might be a smart choice.
If you are looking for the smartest way to borrow, also consider the role the financial institution plays in your community. Does it support local small businesses? Does the money it lends out to people like you allow those economic resources to remain within your community? Is your lender focused on building up your community, or building up the portfolio of its stockholders? It's easy to get a loan from a lot of different sources, but it is smart to get a loan that reinforces your values.
Ultimately, the goal of refinancing any loan, whether it's your credit card, your car, or your home, is to refocus your financial well-being in a beneficial way. Lower interest rates may be the driving force, but you should be sure that your financial institution has the same primary goal as you: your financial self-care. Do your homework and find a banking relationship that isn’t the end, but rather the start of something good.
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