Sometimes when debt gets too high, refinancing is in order to give your savings a bit of relief. While cutting unnecessary expenses throughout the month such as the cable bill when you typically use streaming services, a gym membership where you haven’t showed up for in months, or consistently going out to eat when meal prep would be a cheaper and healthier option, may just not be enough. By refinancing loans, you could shave off significant savings off the monthly payment.
If you helped out your child with tuition expenses with a loan in your name rather than the student taking out loan debt, or even a combination of both, refinancing a Parent PLUS loan to save money is a must. Often these loans carry high interest rates upwards of 7%, which can really inflate monthly payments when the statements start pouring in. Within six months of graduation you could look to refinance to ease the financial burden that you will incur going forward. Even if you have multiple loans, refinancing into a single manageable payment makes sense in order to free up the most savings each month, while continuing to pay down the balance to one lender. Hundreds of dollars of savings each month can add up to tens of thousands over the course of the loan.
Refinancing an auto loan may be helpful in some circumstances. While it can give you relief in the short term, you’ll want to take the overall picture into consideration. Avoid proceeding with a loan that only offers lower monthly payments. This could end up stretching out the payments even longer than the original loan and you could end up continuing to pay on the car for longer than it’s active on the road. Be sure to look for not only a lower interest rate, but for terms that make sense in relation to the car’s age, as well as what you can afford. This will maximize being able to pay off the loan while still hopefully being able to drive a few years without a car payment.
Paying off your home is certainly important, but this is often the debt that experts will tell you to wait on. That's because unlike student and auto loans, a home loan typically has the lowest interest rate compared to other loans, not to mention is likely to continue to gain value each year, building equity along the way. That doesn’t mean you shouldn’t take advantage of a refinance if market rates are lower than what you currently are paying on. While there are typically closing costs added on, the couple thousand dollars up front, of which you can likely roll in, will pay for itself in a few years of monthly payment savings, and decreasing the amount of interest you can pay over the life of the loan. Often you can even find shorter term loans with even lower interest rates if you’re able to afford these payments to payoff even sooner.