Before refinancing a personal loan, do this
This is an option worth considering.
- Refinancing a personal loan could cause the interest rate on it to drop.
- Before you go down this road, there may be another type of refinancing to explore.
The advantage of personal loans is that they allow you to borrow money for any purpose. With a mortgage, for example, you are limited to using those funds to purchase a home. With a personal loan, you can borrow money to start a business, take a vacation, or pay off some of your credit card debt.
The interest rate you get on your personal loan will generally depend on factors such as your credit score and the amount you are borrowing. Market conditions will usually affect your loan rate as well.
There may come a time when it is possible to refinance your personal loan and reduce the interest rate you pay on it. But before taking this step, it could be advantageous to look into another type of refinancing.
Should you tap into the equity in your home to pay off your debts?
These days, American homeowners are sitting on record levels of home equity due to soaring real estate values. And that means you might have a fairly easy time qualifying for a cash refinance.
With a regular mortgage refinance, you borrow the exact amount you owe on your existing home loan. With a cash-out refinance, you borrow more than your remaining mortgage balance and you can use that extra money for any purpose. In this regard, a cash refinance works the same way as a personal loan.
So why would you refinance your mortgage instead of your personal loan? It’s simple. Even with higher mortgage rates these days than they were last year, you could still get a lower interest rate on a cash refinance than you would on a personal loan. If you opt for cash-out refinancing, you can use your proceeds to pay off your personal loan and then pay off your mortgage at an interest rate that could be lower than what you’re paying today.
Is there a downside to doing a cash-in refinance?
A cash-out refinance is a loan that you are responsible for paying. This is why it is important to borrow carefully.
If you limit the amount you borrow through a cash-out refinance to the remaining balance of your mortgage plus the balance of your personal loan, you are not putting yourself in a worse situation, because these are debts for which you are responsible at this time. . What you do not do want to do, however, is go overboard on borrowing with a cash refinance just because you can.
Let’s say you owe $200,000 on your mortgage and $10,000 on your personal loan. In this case, there really is no need to borrow more than $210,000. But if you borrow $230,000 just because the option exists, you’ll have a much higher monthly mortgage payment to follow. So unless there’s a reason to take an extra $20,000 out of your house, you’re better off sticking to that lower amount.
Although personal loans can offer competitive interest rates, you could save even more on interest by using cash refinancing to pay off your personal loan balance. If you’re going to go this route, shop around with different refinance lenders to make sure you get the best rate you qualify for.
The Ascent’s Best Personal Loans for 2022
The Ascent team has scoured the market to bring you a shortlist of the best personal loan providers. Whether you’re looking to pay off debt faster by lowering your interest rate or need extra money to make a big purchase, these top picks can help you reach your financial goals. Click here for the full rundown of The Ascent’s top picks.