Should I Refinance?

Do you currently have a loan with a higher interest rate than you’d prefer? Or, would you like to lower the monthly payments on your current auto or student loan? If you answered “yes” to one or both of these questions, then refinancing your current loan may be the answer for you. 

So, what does it really mean to “refinance” a loan and is it beneficial for me? 

A loan refinance is the process of taking out a new loan to pay off one (or more) outstanding loans. Many loans qualify for refinancing – auto loans, mortgages and student loans, to name a few. When you refinance a loan, you close your old loan and open a new loan account with a better term and/or rate. The old loan is paid off by the new lender so you will not owe anything on your old loan. You then begin making payments toward the new loan with the better term and/or rate. 

Just a quick refresher for all of us – a loan “term” is the number of months/years you will be making payments toward your home loan, auto loan, etc. A loan “rate” is more commonly known as an “interest rate” and is money that we, as borrowers, pay to use a lender’s money – a lender is typically a credit union or bank. 

The process to refinance is fairly simple. First Basin Credit Union invites members, and potential members, to stop in at any of our eight branches if you have questions or would like to begin the process. 

• At FBCU, the process begins by completing the application – loan applications can be completed at any of our branches, or online and selecting the appropriate loan. 
• To properly process the application, First Basin will request your driver’s license, proof of income and two to four references. FBCU will also need the loan information where you are currently financed. 
• FBCU takes approximately 24 hours notify members of approval. Please note: response time is based on how long it takes for the member to submit the required information.
• Once terms have been agreed upon, FBCU handles the payoff of the old loan and setup of the new loan. 
• The final step is to enjoy the terms and/or rate of your new loan and start the paying off process! 

There are many advantages to refinancing an existing loan. The one that stands out most to individuals is saving money on interest costs. To save money, you do have to ensure that you are refinancing into a loan with a lower interest rate than your current loan.

I’d like to use a great example offered by creditkarma.com: let’s say you have an auto loan balance of $20,000 with a 6% interest rate and your payment is $387 for 60 months. If you pay your required monthly payment on time each month, that loan will end up costing you $3,196 in interest. If you refinance this sample auto loan to bring the interest down to 3.5% over the same 60-month timeframe, your payment would go down to $364 per month and you would end up paying $1,830 in interest. In a nutshell, you would save $23 each month on your payment and $1,366 in interest over the remaining life of the loan.

Other benefits, as you can see in the example above, also include the potential of lowering your monthly payment. Since the loan balance you are refinancing is most likely smaller than your original loan balance, and you have additional time to repay, your new monthly payment should decrease. When a refinance leads to lower monthly payments, this can loosen the belt buckle on cash flow in your budget and allow for your money to go to other expenses, if needed. This is also a great opportunity to use that excess money to move into savings! 

Are you considering a refinance to shorten your loan term? Instead of extending repayment, some individuals opt for a shorter-term loan. This can occur, for example, if you entered into home ownership with a 30-year loan and are now in a position to pay more monthly to pay off your home sooner. Your 30-year home loan could be refinanced into a 15-year home loan that typically will come with a lower interest rate.

Every situation is different; however, if you choose to refinance a current loan, your new loan should always have better terms or features that improveyour finances. First Basin Credit Union is here to help and can answer any questions you may have. Stop in and see us today or give us a call. We want to see you come in first and will do what we can to get you there.