Living under debt can be a challenge. For many, if not most, it can also be unavoidable. Everything from purchasing a home or car to obtaining a college degree usually comes part in parcel with a massive financial burden. The average person doesn’t have a comically oversized bag of money with a dollar bill sign on it to dramatically put on the counter whenever we buy something, which means that most of us will need to take out loans to get ahead. For those borrowing to buy a house or attend university, that debt can get out of control fast.
Fortunately, there are options for when debts get out of hand and repayment becomes an impossibility. One of the best of these options is refinancing your loans. There are a lot of misconceptions about how the process works, and it isn’t a miracle cure for all your financial problems, but under the right circumstances it can help get your money and your life back under your control. Having good Knowledgemerger refinansiering – that is, understanding of how refinancing works – will be your best tool for knowing when it’s a good idea or not quite right for you. In this article we’ll explore how it works and how it applies to the two most common sources of debt: mortgages and student loans.
The Basics
On paper, the process isn’t hard to understand. In practice, it can be more complicated. Refinancing is taking one or multiple loans and renegotiating them into a new payment structure, either directly with the lender or with a third party that assumes control of the debt. In the latter case, the third party (usually a bank or a private company) pays the remainder of what you owe to whoever owns the original loan, and you start paying that company back instead. This is a great way to get a fresh start on what you owe, complete with a new interest rate and lower monthly payments. Everything from credit cards to retailer lines of credit, the kind people take out to buy appliances or furniture, are subject to potential refinancing. The two most popular options are, of course, homes and education.
Loans involve both a principal amount, which is what you borrowed, and interest payments. The interest is where loans become dangerous, as they can inflate the owed amount to insane levels that are frequently difficult to foresee or plan around. A high interest rate can kill your monthly budget and make repayment hard, if not outright impossible. Restructuring a loan is the most common way to lower these interest rates. In fact, if refinancing won’t lower the interest rate, you really shouldn’t go through with it in the first place – at least, for a single loan.
For multiple loans, however, you may want to consider it even if the interest rate on your new debt is higher than on the others. Consolidating loans into a single monthly payment will almost always either be a neutral change or lower your payment, and either one is favorable to having many smaller debts that could easily escape your attention. While a higher interest rate may mean a slightly higher overall monthly payment, you still benefit from having all of your debts combined into one more easily manageable unit. That said, you and you alone will be able to determine if doing so is a better financial decision for you. Refinancing is a tool that can help bring your finances under control, but there are circumstances where it isn’t the right choice.
Student Loans
This kind of debt is a good example of how consolidating multiple sources of repayment into a single source can be beneficial to the borrower. Student loans are the centerpiece of a massive crisis for borrowers. As you cans see here, they have ballooned out of control and are putting a massive financial burden on those who borrowed for the sake of getting a degree. Wages are stagnating, and degrees don’t have the same market power that they did in previous decades. Too many people are finding that their degrees don’t get them good jobs, and the jobs they do get don’t pay enough to allow repayment of the loans. The choice between paying rent and paying the lender is a real one for the majority of students.
Refinancing has become a popular option for getting this kind of debt under control, especially if you have both federal and private loans. Interest rates on student loans are absolutely insane, and consolidation is frequently the only real way that a borrower can start to get a foothold on paying it back. With multiple loans, you run the risk of a phenomenon called interest drowning, which is when the combined interest rates from multiple loan sources make the debt rise so steeply that even making consistent monthly payments still causes the amount owed to go up. Getting all of your ducks into one pen makes the whole flock more manageable, and can reduce the risk of interest drowning. There are almost no situations in which refinancing your student loans is a bad idea.
Mortgages
Derived from the French phrase “death pledge”, mortgages are another source of massive debt for an essential cause. Owning a home is the dream for most people, but without borrowing a large sum of money to do it those people are almost always out of luck. A mortgage can feel overwhelming, especially when the interest rates fluctuate with the market – what’s called a variable rate – and make your monthly bill even higher from year to year. Indeed, the phrase “death pledge” is one of the more apt phrases you’ll find in finance, as it can genuinely feel like it will kill us.
It can be overwhelming to stay on top of a mortgage. Fortunately, refinancing is a fantastic way to make it even more manageable. One of the best times to refinance is when you’ve been dutifully paying for a few years and your credit score is higher than when you first took out the loan. A higher credit score means a lower interest rate, and paying your bill every month does wonderful things for your credit score. While the standard idea of refinancing is usually a great idea, there’s a special kind unique to mortgages that doesn’t always work out long term. If you refinance in a way that you renegotiate for a higher amount than the remaining debt is for, you can draw that remainder in cash. This is called a cash-out refi, and is only advisable in instances when you need a large amount of cash for a financial emergency.
There are other times when refinancing isn’t a good idea, too. You may find that you don’t have enough money to cover the new closing costs, which are something you’ll still need to pay. Additionally, you might accidentally extend your break-even period, which is the measure of how long it takes for your investment to even out. In either of those circumstances, you should avoid refinancing altogether. The point of refinancing is to make your financial life easier, and neither of these two options do that for you.
