Managing your finances is a tough job that is why there are times when refinancing loans makes sense. In the midst of all the possible financial decisions you have to make, this can be one of the more intimidating turning points in your money management journey. This is because a lot of people doesn’t really understand the need why they should refinance their loans.
For some, they do it to take control of the mortgage payments while others are looking to take advantage of certain economic factors. You might be hesitating to dive in and refinance your loans because you do not see a problem with your current setup. As most people would say, if it is not broken, do not try to fix it because you might only make matters worse.
However, there are people who prefer to refinance their loans to make things better and not just to fix things. Here are a few of the instances when refinancing loans makes sense.
When interest rate are on their way up
When you take out a loan the likes of a mortgage debt, you have an option to either lock-in your interest rate or stick with a variable one. There are people who choose the latter because it seems to be smaller at the beginning. However, you run the risk of being handed a higher rate in the future as it is dependent on certain economic factors.
When this happens, you could end up with a higher rate which leads a higher payment. And if the recent news shared by CNBC that the Federal Reserve its shrinking is balance sheet would push through, interest rates could be going up soon. Refinancing loans make sense if there is an impending increase in your interest rates.
One thing to consider is to change into a fixed-rate term to help ensure that your rate is locked-in regardless how the economy moves. This keeps your stress-free knowing that your mortgage payment will stay the same until you pay off the loan. You also get to plan your finances better because you have a fixed payment amount.
As soon as your credit score goes up
Refinancing loans makes sense also when you know for a fact that your credit score has drastically improved from the last outing. This is important because lenders weigh heavily on your credit score to determine the interest rate on the loan. The higher the score, the lower the rate could be. It also follows that the lower the score, lenders could give your a higher the interest rate or even turn down your loan application.
This is simply because, in the absence of a collateral, lenders would have to rely on your creditworthiness. The score is neatly summarized in three numbers put together by credit reporting bureaus. It is a reflection of how well you have been meeting your financial obligations and serves as a benchmark on how well you would be making payments on the new loan.
When you want your savings to go up
Refinancing your loan usually entails a lower monthly payment. This is due in part to a lower rate and longer repayment time frame. This two helps you lower your payment amount every month and as a result gives you the chance to increase your savings amount. You can put more focus on your retirement fund and even your reserve funds.
You just have to make sure that you are able to consider all the factors involved when refinancing to save money. This is because there are other costs to consider which could affect your nd goal. There are closing costs you have to shoulder when refinancing some loans. On top of this, a longer repayment timeframe can mean bigger total payment at the end as well. So consider these factors to see if you will really get out ahead.
What to do after
Once you understand financial instances when refinancing makes sense, what do you do next? How do you keep on track and not make matters worse for you? Here are a few things to remember.
Stick to your payment schedule
Once you refinance your loan, the last thing you need is sending in late payments. A recent study conducted by The National Foundation for Credit Counseling recently found out that about 1 in every 4 consumers are unable to pay bills on the right time. This will have adverse effects on your finances. For one, your credit score will take a hit and can impact future financial options. You could have a hard time applying and getting approval for a different loan in the future or be given a high-interest rate. Put a system in place to help remind you of due dates whether by putting it in your mobile reminders or writing it down on your desk calendar.
Debt consolidation can help you manage your payment schedule. This is because you get the chance to focus on just one payment due date rather than juggle multiple payments at the same time. You also get the chance to send out one payment amount which lowers the chances of paying a lower amount or mixing up payment amounts.
Do not add on more debt
As you refinance your loan, you might be tempted to take on new debt accounts. You need to keep this in check because adding unnecessary debt is never a good thing. What makes this more challenging is when you just refinanced your loan and you are all set on the new payment amount. Adding more debt will mess up your schedule and could put you off focus and affect your payment schedule.
What can help
At this point, you could already be convinced that refinancing loans makes sense and are looking for ways to make it easier for you to meet your payments. This usually means increasing your sources of funds to help widen the gap between your income and expenses. Here are a few things to consider.
Create income-positive hobbies
Do you love taking photos or baking cookies over the weekend? How about painting or even putting together logos and other design items? You can use this passion and create an income-positive hobby. Try offering your services to family and friends over the weekend or even joining weekend markets to sell your cookies. The idea is to earn from doing the hobbies that you love.
Look for passive income source
Passive income is basically earning without being too much involved in the process. This can come from investments, business ventures, or even rental properties. This is a great way in complementing your regular income because it does interfere too much with your daily activity and needs minimal supervision on your part.
If you have a spare room in the house, you can have it rented out. It is also possible to setup an online shop and has everything automated from the ordering to delivery. You can check in every now and then on the status of your store. You can also manage inventory and make sure your customer’s concerns are addressed from home.
Refinancing loans makes sense when it will help you manage your funds better. If it can lower your monthly payment or provide you better opportunities in the future the go ahead and refinance your loan.