Why Does My Bank Want Me To Refinance?

You've received many emails and letters from your bank, encouraging you to refinance your loan. While part of you may like by the idea of having a lower interest rate, or getting to renegotiate the terms of your loan, you may also wonder: what's in it for them? After all, reduced interest means less money for the bank, right? It's a good question to ask, so let's talk about it.

Yes, refinancing a loan will help you save money and better manage your monthly budget by getting you a lower interest rate or change the loan period.

There's a catch, though.

Consider the costs

Refinancing a loan can save you money by lowering your interest rate, but it also requires you to pay fees. For example, you may have to pay an application fee which allows institutions to make more profit. If you're refinancing a mortgage, you'll also have to repay your closing costs.

This doesn't mean, however, that refinancing isn't a good idea. It can actually be a win-win experience, depending on your situation.

Consider the time

To determine whether refinancing makes financial sense for you, consider how long you'll be living in your home and whether the savings you'll receive from a lower interest rate will eventually make up for the costs you'll pay up front.

Your financial institution wants to keep you happy

Another reason lenders might encourage you to refinance is to prevent you from seeking out a lower rate elsewhere. By offering the best rates, banks are able to keep their account holders' business, and ensure a positive experience to promote future business.

If your credit union or bank is giving you the opportunity to refinance, weigh the options, crunch some numbers, and see whether or not it's worth your while.

Tags: Home Ownership, Personal Finance, Debt