What Does It Mean to Refinance a Loan? You hear it on advertisements all the time. Everyone is trying to get you to refinance your loan with them. They talk of being so deep in debt that you just can’t afford your monthly payments anymore. They say that refinancing is the light at the end of the tunnel. But to be honest, they never really talk much about what refinancing does. Is it really helpful? What fees will be incurred because of it? What can refinancing do to your credit? This post will work to unravel the mystery of what it means to “refinance” a loan and what the consequences are for doing so. Take a look.
What Refinancing Does Starting from the basics, what does it mean to refinance a loan? Refinancing a car or VA home loan does exactly what the ads say it does, it gives you hope for an affordable monthly payment. Your first financing refers to the initial loan taken out. That’s the loan that made your expensive purchase possible. It comes with its own payment plan and interest rate to return what you borrowed. If the economy took a turn for the worst, you lost your job, or unexpected expenses came knocking at your door, you could run into the problem where your monthly premium payment is no longer plausible. In the case of paying off a 40 year mortgage or VA home loan, this isn’t an altogether unlikely scenario. So what happens when you can no longer make your payments? The lender has the right to walk in and repossess his or her property. In the case of a car, it could simply mean taking an expensive vehicle away. In the case of a home however, this could mean an eviction notice. Families can’t afford that to happen. Refinancing allows you to meet back with your lender, tell them your situation and see if you can get the terms of your agreement changed (often reduced to a more affordable price) based on past good behavior. If you and the lender can agree on new terms, you can benefit from a reduced monthly payment. Refinancing can also mean meeting with a new lender to replace your current loan with theirs. What consequences does this have for an individual though?
Credit Score In regards to your credit score, your credit shouldn’t be hurt too much by a single refinance. If, however, you make it a habit of refinancing credit cards, your credit report will be pulled in excess as well (hurting your credit). A single refinance for a VA home loan won’t hurt you too much. Multiple will though, so use this option only when you need to. Warning, opening up new lines of credit during this time will hurt your credit. Don’t do it, even to save 25% or more. Another downfall of refinancing mortgages or VA home loans is that you’ll often be put back in for a 25-to 30-year loan, extending the time you’re in debt. That could be worth it if you’re saving a VA home loan on a mortgage. It could be detrimental if saving a loan on a depreciating vehicle. So when you hear the advertisements screaming opportunities to refinance, just remember that for every ray of hope comes a consequence. Weight your options before making a final decision. You could either end up with a life-saving deal, or a monster of debt.