general refinancing question

[jupiterjet]

For some reason I've always been scared of the word 'refinancing', but today, i want to learn what it's all about. So is it essentially taking out loan with lender #1 and when lender #2 offers better terms, the loan will just be sold to them and I reap all the benefits of the new terms? Is there any catch at all for me? thx

[JoeRockhead]

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@jupiterjet wrote:

For some reason I've always been scared of the word 'refinancing', but today, i want to learn what it's all about. So is it essentially taking out loan with lender #1 and when lender #2 offers better terms, the loan will just be sold to them and I reap all the benefits of the new terms? Is there any catch at all for me? thx

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Refinancing is basically taking out a new loan to pay off the old loan. Lender #2 isn't simply buying your existing loan and giving you better terms.

You apply with lender #2 just like you would for other new credit. They're going to look at your credit, income, debt, collateral if applicable, etc. If approved, the new loan pays off lender #1 and you now owe lender #2 under the new interest rate, payment and terms.

And yes, expect a credit pull because you're applying for a new loan. 

The "catch," if there is one, is to look at the whole deal and not just the new monthly payment. A lower payment isn't necessarily a better deal if you're extending the loan another several years or paying enough fees that they eat up the savings.

[dfwxjer]

I'll echo what the previous poster said. 

Interest is front loaded so take in to account remaining interest across the original term and compare to the total interest for the new loan. 

The earlier in the term the better as far as refinancing goes. A lot of people end up paying more overall interest while thinking the new lower rate is helping them. 

[Realist]

Typically you would want to refinance so long as you can get something financially stronger out of the transaction, but you really want to run the numbers.  This may include:

• A better rate.
• A better term.
• Reduction in overall total repayment.
• A cash out refi (where the cash is actually free in the form of a reduction through other advantagous means).

Ideally, more than one.

Leading up to 2020 interest rates were declining, and as many people know today, rates have doubled and tripled off those lows.  Rates are elevated, and possibly rising.  A better term could be along the lines of jumping from a 30 yr down to a 15 yr, but you can almost simulate this by prepaying on the existing mortgage each month - leaving the built in safety net of the 30 yr.  You can use a calculator to factor in how much extra to add onto a payment, and so long as you are disciplined, this action can work.  A cash out refi is a bit different, as when there's enough equity to pull from, no one really wants to take on a higher monthly payment.  One way to have countered this in the past, was to catch falling interest rates where as the decline was enough to offset the extraction amount - while still carrying the same monthly payment or less.  That could have made for a great refinance move so long as you could account for the new mortgage term reset.  There was a time and place for this, and todays economy isn't really the time.

In todays market you would want to fully understand what you are receiving, and then run a few numbers to understand whether it's worthwhile.  Sometimes the costs or fees of refinancing will offset the benefits, and it won't make sense to do so.  Other times, the advantage of the refiance will take several years to a decade or so before you see the gains of that refi.  During this time, you won't likely want to refinance again (unless it's extremely beneficial) or move out of the house (again unless it's beneficial), because you would lose out on the overall benefits of that initial refi.

[dfwxjer]

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@Realist wrote:

Typically you would want to refinance so long as you can get something financially stronger out of the transaction, but you really want to run the numbers.  This may include:

• A better rate.
• A better term.
• Reduction in overall total repayment.
• A cash out refi (where the cash is actually free in the form of a reduction through other advantagous means).

Ideally, more than one.

Leading up to 2020 interest rates were declining, and as many people know today, rates have doubled and tripled off those lows.  Rates are elevated, and possibly rising.  A better term could be along the lines of jumping from a 30 yr down to a 15 yr, but you can almost simulate this by prepaying on the existing mortgage each month - leaving the built in safety net of the 30 yr.  You can use a calculator to factor in how much extra to add onto a payment, and so long as you are disciplined, this action can work.  A cash out refi is a bit different, as when there's enough equity to pull from, no one really wants to take on a higher monthly payment.  One way to have countered this in the past, was to catch falling interest rates where as the decline was enough to offset the extraction amount - while still carrying the same monthly payment or less.  That could have made for a great refinance move so long as you could account for the new mortgage term reset.  There was a time and place for this, and todays economy isn't really the time.

In todays market you would want to fully understand what you are receiving, and then run a few numbers to understand whether it's worthwhile.  Sometimes the costs or fees of refinancing will offset the benefits, and it won't make sense to do so.  Other times, the advantage of the refiance will take several years to a decade or so before you see the gains of that refi.  During this time, you won't likely want to refinance again (unless it's extremely beneficial) or move out of the house (again unless it's beneficial), because you would lose out on the overall benefits of that initial refi.

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This is the Auto Forum so slightly different application when discussing an auto loan refinance. 

[Realist]

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@dfwxjer wrote:

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@Realist wrote:

Typically you would want to refinance so long as you can get something financially stronger out of the transaction, but you really want to run the numbers.  This may include:

• A better rate.
• A better term.
• Reduction in overall total repayment.
• A cash out refi (where the cash is actually free in the form of a reduction through other advantagous means).

Ideally, more than one.

Leading up to 2020 interest rates were declining, and as many people know today, rates have doubled and tripled off those lows.  Rates are elevated, and possibly rising.  A better term could be along the lines of jumping from a 30 yr down to a 15 yr, but you can almost simulate this by prepaying on the existing mortgage each month - leaving the built in safety net of the 30 yr.  You can use a calculator to factor in how much extra to add onto a payment, and so long as you are disciplined, this action can work.  A cash out refi is a bit different, as when there's enough equity to pull from, no one really wants to take on a higher monthly payment.  One way to have countered this in the past, was to catch falling interest rates where as the decline was enough to offset the extraction amount - while still carrying the same monthly payment or less.  That could have made for a great refinance move so long as you could account for the new mortgage term reset.  There was a time and place for this, and todays economy isn't really the time.

In todays market you would want to fully understand what you are receiving, and then run a few numbers to understand whether it's worthwhile.  Sometimes the costs or fees of refinancing will offset the benefits, and it won't make sense to do so.  Other times, the advantage of the refiance will take several years to a decade or so before you see the gains of that refi.  During this time, you won't likely want to refinance again (unless it's extremely beneficial) or move out of the house (again unless it's beneficial), because you would lose out on the overall benefits of that initial refi.

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This is the Auto Forum so slightly different application when discussing an auto loan refinance. 

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Well **bleep**.  You did catch me with my pants down on that one.  Nicely done.  I'm going to have to say I completely missed that.  Thought I was in mortgage section for some reason.

[Gollum]

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@jupiterjet wrote:

For some reason I've always been scared of the word 'refinancing', but today, i want to learn what it's all about. So is it essentially taking out loan with lender #1 and when lender #2 offers better terms, the loan will just be sold to them and I reap all the benefits of the new terms? Is there any catch at all for me? thx

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This may be interesting (but not useful, and maybe even outdated ), but it is regarding refinancing an auto loan :

When I started the process of buying a house, I had an auto loan at a relatively high interest rate. The auto loan was almost paid off. The auto was still worth enough that I had equity in the auto. My mortgage lender refinanced the auto loan (the original auto loan was from a different lender) at a much lower interest rate, then used the resulting equity funds/cash (from the refinced auto loan... I think the vernacular is "I pulled the equity out") as part of the down payment for the house in order to qualify for the first time buyers program mortgage on the house. That was a long time ago, and I don't know whether or not it is still possible to do.