Compare your current loan with a refinanced loan side by side, including cash out, points, and fees.
Loan refinancing involves taking out a new loan, usually with more favorable terms, in order to pay off an old one. Terms and conditions of refinancing vary widely. Refinancing is more commonly associated with home mortgages, car loans, or student loans. In the case that old loans are tied to collateral (assets that guarantee loans), they can be transferred to new loans. If the replacement of debt occurs under financial distress, it is called debt restructuring instead, which is a process to reduce and renegotiate delinquent debts to improve or restore liquidity.
Save Money — If a borrower negotiated a loan during a period of high interest rates, and interest rates have since decreased, it may be possible to refinance to a new loan with a lower interest rate. This saves money on interest costs for the borrower. It is also possible to refinance when a borrower's credit score improves, which may qualify them for more favorable rates. This can in turn improve credit score even further if borrowers use the money saved to pay off other outstanding debts.
Need Cash — The balance of a loan will decrease during the payback process. When enough equity has accumulated, the borrower may cash out by refinancing the loan (mostly home mortgage loans) to a higher balance. However, refinancing normally requires the payment of certain fees. Unless accompanied with a lower interest rate, cash-out refinancing is normally expensive.
Lower Payment Amount — Borrowers struggling to meet the minimum monthly payments on a loan can refinance to a new loan with lower required monthly payments, which can help ease the financial burden. However, most probably, this will increase the loan term and increase the total interest to be paid.
Shorten the Loan — Borrowers can potentially pay off their existing loans faster by refinancing to shorter loan terms. One of the most common examples is refinancing a 30-year mortgage to a 15-year mortgage, which typically comes with a lower interest rate, though this will most likely result in a higher monthly payment.
Consolidate Debt — Managing one loan with a single payment date instead of multiple loans with multiple payment dates is much simpler. This can be achieved by refinancing multiple loans into a single loan (especially one that has a lower interest rate than all previous loans).
Switch from a Variable Rate to Fixed, or Vice Versa — It is possible to use loan refinances to make the switch from variable interest rates to fixed interest rates in order to lock in low rates for the remaining life of the loan, which offers protection from rising rate environments.
Refinancing a mortgage may come with different benefits such as getting a lower rate, switching from an adjustable rate mortgage (ARM) to a fixed mortgage, consolidating combo mortgages or other debt, removing someone from a loan (example being ex-spouse), and more, depending on the type of refinancing.
Cash-Out Refinance — It is refinancing with a new loan amount higher than the remaining owed amount on existing mortgages. The difference goes to the borrower in cash. Generally, borrowers need at least 20% equity in their property to be eligible for cash-out refinances. As with most loans, there will be fees associated with cash-out refinances, typically hundreds or thousands of dollars, which should be factored into the decision-making process. Essentially, cash-out refinancing involves turning the equity built in a home into additional money. Some borrowers use the money for home improvements. Others may use it for situations such as medical emergencies or car repairs. It can also be used it to pay off credit cards or other high interest debts.
FHA Refinance — While mortgages from the Federal Housing Administration (FHA) have less stringent down payment requirements, unlike conventional loans, mortgage insurance premium (MIP) payments are still required after 20% home equity is reached. This can be circumvented by refinancing from an FHA loan to a conventional loan after 20% equity value is reached, since conventional loans do not require MIP payments after this point.
Rate and Term Refinance — This method refinances the remaining balance for a lower interest rate and/or a more manageable loan term. This differs from a cash-out refinance. Rate and term refinances are common when interest rates drop.
When refinancing mortgages, there are a number of common fees that may apply. There is an input in the calculator to consider these in the subsequent calculations.
Before considering refinancing student loans, in the U.S., different repayment plans are available for those struggling to meet their payments; borrowers can change their standard repayment plan (10 years) to a plan such as one that is income-based, graduated, or extended. Students who find that they are unable to meet payments regularly may consider requesting deferment or forbearance. In specific situations, federal student loan debt can be completely forgiven, such as through the Teacher Student Loan Forgiveness program. When federal student loans are refinanced, they are no longer considered federal loans, but private loans, losing all the benefits of a federal loan.
It is possible to refinance a car loan in order to increase the length of the loan, thus reducing the size of the monthly payments. Although this gives borrowers a bigger window to pay off their car loans, it typically increases the cost of the loans because more interest will be paid. When refinancing, beware of "upside-down" auto loans, which refer to loans that the amount owed is more than the book value of the vehicle.
While credit card debt differs from the other loans mentioned in that it is a revolving form of credit, it can also be refinanced. One of the easiest ways to do so is to open a new balance transfer credit card. A balance transfer is a process of transferring high-interest debt from one or more credit cards to another card with a lower interest rate.
Refinancing a personal loan can be beneficial if the new personal loan has a lower interest rate or a different repayment period. This is an option for borrowers if interest rates have declined, their credit has improved, they have higher income, or they didn't get the best rate on their initial personal loan. Similar to the refinancing of other types of loans, whether it is beneficial or not will depend on whether the interest savings exceeds the charged fees for refinancing.
💡 Tip: Always calculate the break-even point — the time it takes for your monthly savings to exceed the total cost of refinancing. If you plan to stay in the loan long enough to pass this point, refinancing is likely worthwhile.
Refinancing a mortgage typically takes 30-45 days. Personal loans, auto loans, and student loans can often be refinanced much faster, sometimes within a few days to a week.
The break-even point is the number of months it takes for your monthly savings from a lower payment to equal the total closing costs of the refinance. If you plan to stay in the loan past this point, refinancing saves you money.
Refinancing typically causes a small, temporary dip in your credit score (about 5 points) due to the hard credit inquiry. However, if you keep up with payments, your score may improve over time.
Yes, but you will likely face higher interest rates and stricter terms. Improving your credit score before refinancing can help you secure better rates.
Refinancing replaces one loan with a new one, often with better terms. Consolidation combines multiple loans into a single loan. A debt consolidation loan is a type of refinance that pays off multiple debts.
The Refinance Calculator from ToolShed.click helps you make informed decisions about refinancing your loans. By comparing your current loan with a potential new loan side by side, you can see the monthly payment differences, total interest costs, and break-even point. Use this tool to determine whether refinancing is the right financial move for you.