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Refinance Loans to Manage or Reduce Debt

07/07/2020 - Responsibly Borrowing & Managing Credit, WesBanco Wellness Series, Debt Takedown

WesBanco Wellness: Debt Takedown

Feeling overwhelmed and beaten down by debt? It’s time to take the power back with a debt-crushing game plan. In the WesBanco Wellness series, Debt Take Down, we’ll share debt payback hacks that will empower you to achieve your financial goals.

What Is Loan Refinancing And How Can It Help You Pay Down Debt?

Refinancing is one of the most effective ways to help you pay down debt in its many forms whether it’s debt from a mortgage, credit cards or student loans. Essentially, refinancing replaces an old loan with a new one – one with terms that are better for your situation. For example, if you have a loan with a high-interest rate or a short repayment period, that high monthly payment may leave you feeling trapped by the amount of money you have to pay each month. Refinancing a loan to better terms or with a lower interest rate can lower your monthly payments and total interest, allowing you more freedom as you pay down your debt. However, it’s essential to understand the loan refinancing process before going forward because sometimes you need to forfeit certain benefits on existing loans or increase your total debt.

What types of loans can be refinanced?

While it is most common to refinance mortgage loans, you may also be able to refinance auto, personal and student loans. You can even “refinance” credit card debt by transferring the balance you owe to another credit provider with better terms, also known as a Balance Transfer.  You can also take out a loan, like a Home Equity Flexline to pay off the debt by consolidating it into a HELOC (home equity line of credit) debt under new terms.

How Does Refinancing Work To Reduce Debt?

First, you have to qualify for revised loan terms the same way you applied for your first loan. You may be able to refinance debt with your current lender, or by taking out a new loan with a new lender. If you opt for that route, you’ll pay of your existing debt with your new loan before repaying under your new terms. You will need to qualify for a new loan rate either way, and lenders will consider your income, credit history, and credit score when you apply.

Once qualified, you may be able to refinance your loan so that:

  • You have a lower interest rate and pay less over the lifetime of the loan – and potentially less each month.
  • You extend your loan period so you’re able to reduce your monthly payments. This doesn’t always save you money, especially if you don’t qualify for a lower rate. You may end up paying more altogether.
  • You shorten your loan term so that you pay off debt sooner and pay less interest, but monthly payments will be higher.

These primary benefits of refinancing can make your monthly payments more manageable so you can pay down the refinanced loan or other debt without the stress of missing payments or getting hit with late fees.

When Is It (Maybe) Not Worth it to Refinance?

The benefits of refinancing are enticing, especially if you have a big chunk of debt that could use a refinance. However, not all loans benefit from refinancing equally – some involve a little more consideration:

  • Auto refinancing can be difficult since cars depreciate and lose their value quickly. A lender may be less likely to refinance your auto loan if the car is older, has high mileage or isn’t worth enough for them to feel it’s a safe investment.
  • Student loans, especially federal loans, may have structures that make them eligible for forgiveness or tax benefits. Refinancing these loans into a private loan may negate these benefits.
  • HELOCs and Cash Out Refinancing can help you pay down debt under better terms, but with more impactful collateral. Make sure you understand the risks before leveraging your home to pay off other debts.

Another consideration to weigh before refinancing your loans is additional costs and fees that may come from closing the loan. Since you’re taking out a new loan to pay the other off, you may encounter fees and closing processes similar to your original loan. Depending on your existing loan structure, you may also face prepayment penalties—fees assigned if you pay off a loan early. You may be able to roll the cost of these fees into your new loan and pay them off over time. And as long as you still see benefit from the new loan structure and balance, it may be worth it to refinance.

When to Refinance: What Factors Signify the Time is Right?

  • The best time to refinance can depend on several factors:
  • Interest rates have dropped since you first got your loan.
  • The terms of your new loan opportunity allow you to pay less (in total or in near term).
  • Your credit score has improved significantly and you may qualify for a lower interest rate.
  • You’re struggling to make your monthly payments and lowering them could help take some of the strain off your budget.
  • Your loans have a low or no prepayment penalty and so there will be minimal fees if you refinance that debt.
  • You have the opportunity to refinance to consolidate debt into a new loan with better terms for more streamlined payments.
  • You receive a balance transfer offer from a credit card with a 0% interest period that would allow you to make payments without additional interest penalties and get debt under control.
  • You want to leverage equity in a loan for extra cash*.

*A cash-out refinance restructures your loan to provide cash based on equity you have built – essentially allowing you to re-borrow what you have paid down. This can be beneficial when you need additional funds for a renovation or emergency expense but should be considered carefully in the context of your full debt portfolio.

Finding the Right Lender for a Refinance

If you’re considering refinancing your loans, start by taking stock of your existing debt. Review your loan terms, interest rates and how much you still owe (with principal and interest). Talk to your current lender to see if they have any refinance loan terms that meet your needs and compare their terms with other potential lenders to get quotes. These quote requests could count as a hard inquiry into your credit, but if you collect quotes within a short period of time (usually about a month), talking to multiple lenders should only count as one hard inquiry on your credit report.

If the terms and rates you receive match the guidelines above, refinancing may be one of the most powerful moves you can make to help overcome debt. The lending team at WesBanco can help you determine the best next steps based on your debt portfolio and our mortgage refinance, credit cards with balance transfer rates and personal loans may be a great way to manage your debt effectively.

Mortgage Refinancing

Personal Loans

Content is for informational purposes only and is not intended to provide legal or financial advice. The views and opinions expressed do not necessarily represent the views and opinions of WesBanco.

While we hope you find this content useful, it is only intended to serve as a starting point. Your next step is to speak with a qualified, licensed professional who can provide advice tailored to your individual circumstances. Nothing in this article, nor in any associated resources, should be construed as financial or legal advice. Furthermore, while we have made good faith efforts to ensure that the information presented was correct as of the date the content was prepared, we are unable to guarantee that it remains accurate today.

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