Loan Refinancing – Why You Should Refinance

Loan refinancing allows you to replace your current debt with a new loan that has a lower interest rate and different payment terms. Refinancing also provides an opportunity to tap into your equity for large purchases or to consolidate debt.


You can prequalify for a refinance without impacting your credit score. However, when you apply for a new loan, a hard credit inquiry is made and can temporarily affect your score.

Lower Interest Rates

One of the main reasons borrowers refinance is to enjoy a lower interest rate. This could happen if your credit has improved since you took out the original loan or if lenders are offering competitive rates due to market conditions. Getting a rate that is even just a percentage point lower can lead to significant savings, especially if you opt for a shorter repayment term.

You may also choose to consolidate your debt through loan refinancing. This allows you to clump your different loans together into a single payment that’s much easier to manage. Managing a single payment is often more manageable than paying off multiple loans with different payment dates, which is why loan refinance makes sense for many borrowers.

Another benefit of refinancing is that it may allow you to tap into your home equity for cash. This could be a useful tool for covering big expenses such as home renovations, sending a child to college or taking a vacation. The key is to weigh the pros and cons of tapping into your home equity before deciding whether it’s right for you. In most cases, you’ll pay closing fees when you refinance, which is why it’s important to consider how those costs will be paid for when weighing the benefits of this strategy.

Lower Monthly Payments

Some loan refinance options allow borrowers to lower their monthly payments by altering the length of their repayment terms. This may make it easier to manage existing debt payments or help build equity faster, though it will also increase the overall amount of interest paid over time.

Borrowers can also use a loan refinance to switch from a variable rate to a fixed rate, or vice versa. This can offer peace of mind that your loan payments will be consistent over the entire life of the loan, or provide protection from future interest rate increases if you anticipate rising rates.

If you have a lower income or unexpected expenses come up, lowering your loan payment amount can be helpful. This may require extending your loan term, which can add to the total amount of interest paid, or switching to a longer repayment period that could take you to retirement before paying off your debts entirely.

In rare circumstances, borrowers can access the equity built up in their property through a cash-out refinance. This can be used for home remodeling projects, sending children to college or taking a dream vacation. This option usually comes with fees, however, so it is best reserved for situations in which the added financial prudence will offset the additional costs. You can calculate the cost of cash-out refinancing using online tools.

Consolidate Debt

It can be challenging to keep track of multiple debt payments each month, and loan refinancing could make it easier by combining your balances into a single payment. This can help simplify your finances, but it’s important to have a solid repayment strategy before taking on any new debts.

Debt consolidation can be done through a personal loan, debt management plan, home equity loan or a balance transfer credit card. Each option may offer different benefits, but it’s important to shop around and find the best deal for your needs. You can also work with a credit-relief agency that negotiates the terms of your debts with creditors to reduce your overall debt load.

Refinancing can give you a lower interest rate and allow you to pay off your loans faster, which can improve your credit score over time. However, the new loan you obtain may require a higher down payment and come with fees, including origination fees. Before deciding to refinance, be sure you understand the terms of the loan and compare offers from several lenders. Some lenders will prequalify you for a loan, which can save you time and avoid multiple hard inquiries on your credit report.


Refinancing allows you to choose a new loan package that better suits your financial goals. This may include a flexible loan, which enables you to vary the amount borrowed and repayment schedule according to your needs, such as during times of high expenditure. It can also enable you to switch to a fixed interest rate, which may reduce your monthly payments.

The flexibility of loan refinancing is an important consideration for both borrowers and lenders. For borrowers, it offers the ability to adapt to changing financial needs, which is especially relevant in commercial real estate financing. However, it is critical that borrowers understand how to balance the need for flexibility with their desire to minimize prepayment penalties and fees. This requires both a higher level of transparency and flexibility on the part of lenders and borrowers alike.

For example, our research has shown that borrowers who report drafting budgets on a regular basis and having a tendency to worry about household financial decisions are more likely to select the flexible contract (see Figure 1). This shows that borrowers can benefit from flexibility in their loan arrangements in addition to lower interest rates. Similarly, small business owners face a significant level of uncertainty in their cash flow due to seasonal fluctuations, and the ability to modify their loan contracts to fit their current financial circumstances can be beneficial for their operations.