Financial strategy refinancing is popular among the borrowers who want to secure lower interest rates or reduced monthly payments or adjust loan terms. However, one common question arises when considering this option: refinancing restarts your loan, what do you have to lose? In this article, we’ll explore what refinancing is, how it affects your loan and your finances. We’ll dig down into the facts so you can make an educated choice.
What Is Loan Refinancing?
Refinancing is when you replace an existing loan with a new loan, but hopefully under better terms. Most commonly applied to mortgages, car loans and student loans. Borrowers opt for refinancing for various reasons, such as:
Lowering interest rates.
Adjusting the repayment term.
Merging a number of loans into one.
Changing from variable to fixed rate or from fixed to variable.
How Does Refinancing Restart Your Loan?
So in short, the answer is yes, when you refinance, your loan usually restarts again. When you refinance, you’re paying the old loan off and then paying a new loan — essentially switching banks. It has a new repayment term and typically begins from the start.
How This Works:
New Loan, New Term: When refinancing, the clock on your repayment schedule resets. For instance, let’s say that after five years you refinance a 30 year mortgage, the new loan could have another 30 year term, unless you decide otherwise.
Customizable Terms: Most lenders give you flexibility when it comes to the term of the refinanced loan that you choose. E.g. if you want to pay off the loan quicker then you can take a shorter term: 15 or 20 years.
Cons and Pros of Restarting Your Loan
It’s important to realize what happens when you start over your loan term. Let’s explore the benefits and drawbacks:
Pros:
Lower Monthly Payments: It extends your term, when you can spread payments over a longer period thus reducing your monthly burden.
Lower Interest Rates: Often, we have the chance to refinance it and save on interest based on lower rates.
Debt Consolidation: This means that by restarting your loan, it enables you to consolidate debts so it is repaid easily.
Cons:
Higher Total Interest: Restarting the loan can result in an even higher overall interest over the life of the loan.
Longer Debt Commitment: With this same meaning if you extend the term, you will be in debt over a longer period of time.
Refinancing Costs: Refinancing can have closing costs and fees that outweigh potential savings.
Refinancing: How do you minimize the downsides?
To avoid unnecessary financial strain, consider the following strategies:
Opt for a Shorter Loan Term: Pick a refinanced loan term that matches more or less the remaining years on your first loan.
Compare Lenders: Try to compare your interest rates and loan terms.
Calculate Break-Even Point: Find out how quickly your monthly savings will pay for the costs of refinancing.
Avoid Unnecessary Refinancing: If the gains from refinancing outweigh the costs, then only refinance.
Refinancing Scenarios: When Does It Make Sense?
1. Lowering Your Interest Rate:
Refinancing to reduce your interest rate can help if your credit score has improved or market rates have dropped: You can cut your loan cost by thousands of dollars.
2. Changing Loan Terms:
New to paying off your loan faster? The best way to do this is to refinance to a shorter term such as 15 years rather than 30.
3. Cash-Out Refinancing:
When refinancing your home using cash out, as a homeowner you can access your equity to pay for large expenses, such as renovations, or you can consolidate debt.
4. Switching Loan Types:
If you chose a variable rate loan initially, with the fear of rising rates, you can look to refinance to a fixed loan, to stabilise.
Does Refinancing Always Re-start the Clock?
As a rule, refinancing starts the loan term over again, but some lenders are flexible. For example:
Custom Terms: On the other hand some lenders allow for a refinance with a term the remaining duration of your current loan.
Loan Recasting: Refinancing is when you switch the type or term of your loan; this is an alternative to refinancing that lets you adjust your monthly payments without changing the term of your loan.
Before Refinancing: Things to Consider
Before deciding to refinance, ask yourself these critical questions:
What Are the Costs? Get a sense of the closing costs and fees so refinancing is financially viable.
When the expiry term ends, what are the conditions at which I will be out of the property? If you’re planning ahead to move soon, refinancing may not be worth the effort.
Will My Financial Situation Get Better? Check that the new loan terms fit your financial aims.
Conclusion
Does refinancing restart your loan? But, yes, in most cases. If you have an understanding of what refinancing entails — and customize the conditions to your situation, refinancing may be a useful method to make your financial situation better. When you want to lower the monthly payments, or score a lower interest rate or refinance the term, refinancing grants flexibility and options but only when the strategy for doing so is well thought out.
Make sure you evaluate your financial situation and come up with a decision yourself before you even sign up for anything. Check if you have all the options laid out in front of you and decide yourself, and only then should you look at whether they are offering more than the rest. Refinancing can be a smart step so long as you plan it out carefully.
