Refinancing allows you to make changes of the previous agreement and you can benefit from it. Seems alright, however, is refinance always a good choice for you?

Well, it depends. You have to consider everything before you make a decision.

The new loan that you refinance should have better terms or lower interest rates that improve your finance. Details differ from case to case. However, there are things that refinancing doesn’t change.

First is your debt. Refinance doesn’t reduce or eliminate your loan balance. The only thing matters is how much interests you should pay. Second one is the collateral. If you used collateral for the old loan, that collateral may still be required for the new loan. That is to say, your collateral can be repossessed if you don’t make payments.

Advantages of refinance

Lower interest rate: the most common reason for refinance is to reduce costs with a lower interest rate, which allows you pay less interests.

Reduce the loan term: terms can be reduced by refinancing. It may result in a higher monthly payment but a lower interest rate. You’ll pay less interests in the long run.

Change your loan type: you can switch a variable-rate loan into a fixed rate one, which can protect you if rates are currently low but will rise in the future.

Disadvantages of refinance

Transaction fees: refinancing needs transaction fees, which can be expensive. This fee varies by lenders and states, but it is usually between 3% to 6% of the outstanding principal.

Higher interest costs: this could happen if you stretch out loan payments over an extended period.

Lost benefits: the old loan may have some benefits you can enjoy but will be eliminated after the refinance. For example, federal student loans are more flexible than private student loans when you really have hard times.


All in all, the most important thing is to make sure that you won’t lose money via refinancing. There are many online calculators for you to calculate how much you should pay. Compare it with your old loan agreement and decide whether you refinance or not.

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