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, so consider the two main impacts for you.

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. If your credit has improved, it may be worth more in the long term to pay the up-front fees. Ask your bank or credit union to give you an idea of what a new rate could be and run it through a loan calculator. If your payments drop over the life of your loan that it makes it worth your while, you consider the option to pay ahead, or put the difference towards other debt.

Consider the time

Surprise — this isn't entirely about how quick you can get the loan processed. To determine whether refinancing makes financial sense for you, consider how long you'll be living in your home or how long you plan to own your car and whether the savings you'll receive from a lower interest rate will eventually make up for the costs you'll pay upfront.

Also, if you are nearing the end of your loan — let's say the last 20% of the time before it is completely paid off — it may not save you enough and leave you paying more interest than principal.

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.

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