Tiana Clewis: Is refinancing your loan really a good idea?
People wonder about that all the time. I know I used to because answering the question is just so much harder than it really needs to be.
Maybe you complained to a friend about one of your debts and they tell you the story about their sister's cousin's friend who refinanced his mortgage and it saved him thousands of dollars. But you talked to your uncle later who tells you his cousin's friend's brother's story about refinancing hiscar and he was a total scam.
Or you get a call from a bank saying they can reduce your monthly payments because interest rates are low right now and if you don't act fast, you're going to miss out because you're not taking advantage. So you sit through their litany of highly personal questions only to have them propose a monthly payment that's higher than the one you already have.
Talk about mixed messaging!
But don't worry, I'm here to help. Today we're going to answer the age old question of "to refinance or not to refinance" because frankly, we're all tired of asking.
Hey, Dreamers and welcome back to my channel, where we break down all things money so it can stop being an obstacle and start acting like what it should be: a tool to help you create a life that you truly and utterly find worth living.
Before I start to breakdown refinancing and help you figure out when you should and shouldn't do it, let me introduce myself to the new kids in town. I'm Tiana B. Clewis, an author, speaker and coach who's dedicated her life to helping women entrepreneurs transform their relationship with money so they can grow their incomem dump debt, and start building the lifestyle they've been dreaming about... while still having some fun along the way.
Believe me, when I say that you can hop on a plane to Europe... when we're no longer banned... and enjoy your daily life at the same time. I've done it and so have my clients.
If you want to join me on this journey, like this video and follow my channel by clicking that red button below. Then hit the bell to make sure you notified when I drop new money tips and strategies each week, that'll help you hit every single financial goal that you have while still enjoying your life.
As always, the first thing we need to do is get crystal clear on what refinancing really means.
It's downright disturbing to think about the number of people I've met, who have been given advice and started to follow it to later discover they didn't actually understand what it meant. It's downright disgraceful people. So let's make sure we understand it first.
Refinancing is when you replace an old loan with a new one. You basically go to a bank, mortgage broker, or a loan company to take out a new loan and use it to pay off the old one.
That doesn't change the principle balance that you owe, because you're essentially transferring the debt. It's similar to when people transfer the balance of one credit card to another one. The total debt hasn't actually changed. In fact, it can increase the principal balance that you owe.
But if you do it right, the interest rate and overall terms of the new loan will be better than that of the old one, resulting in lower monthly payments and a total of less interest paid over the life of the loan.
The cool thing is you can do it with pretty much any kind of loan from auto, mortgage, student loans and even personal ones. While the process is not exactly the same for each type of loan, they're similar enough that I can give you some pretty good guidelines for evaluating when to and not to refinance.
Before you even begin the process of trying to refinance a loan, there are three major considerations that will help you determine whether it's even worth your time to pursue it.
The first consideration is your credit score. Just like with the first loan, your credit score is going to heavily influence the interest rate on your loan. The higher the score, the better chance you have at getting a lower interest rate.
Now, if your credit score is the same or worse than what it was when you took out the original loan, refinancing might just be a waste of your time. You can end up with a higher interest rate, the same interest rate, or even if your interest rate does go down, the change will likely be so small it won't counteract the transaction costs or increased length of the loan.
That's why you typically want to wait until your credit score has improved before actually refinancing the loan.
The second consideration is what the Federal Reserve (aka, The Fed) is doing with interest rates. The Fed plays an important part in managing the economy... something guys should probably make a video onto the future... and one of the things they do is raise or lower the interest rate to help stabilize the economy, like they're doing right now.
This is the primary influence on what banks charge you in interest on your loans. So if The Fed is lowering interest rates below what they were when you got the original loan, it's probably a good time to refinance.
In fact, thanks to coronavirus, The Fed has lowered interest rates by a lot, which is why you've probably been getting a lot of letters and phone calls inviting you to refinance your loans. I recently turned down a company trying to get me to refinance my mortgage.
The third consideration before you attempt to refinance your loans, is your income. Just like your credit score, your income is often a factor in your interest rate because the more income you have, it means the lower risk banks consider you to be. So typically we want to refinance when your income is higher than what it was when you got the original loan.
Now the one time this can be a problem is with student loans, because many of those programs, especially federal loan programs, tend to have income-based plans that assume that the more you make, the more you can pay. So you're going to have to pay very close attention to the terms of your student loans before you go and ask them for a better interest rate, best... based on your income.
Oh, one more thing, and I'll call this number four. I typically advise people to avoid refinancing anything that's going to take 12 months or less to pay off. Unless you have an astronomically high interest rate, like 24%, it's typically not going to be worth it. Your savings are usually too small to even matter in the long run of your budget.
Okay, so now let's say that your income and your credit score are up and the Federal Reeserve has kept interest rates pretty steady, so you've decided to refinance a loan.
Just like with any loan, it's good to shop around for different options to see who's going to give you the best deal. I especially love to hit up credit unions or small regional banks as they tend to provide better interest rates, better loan terms, just in comparison to those massive banks, like the Wells Fargos and the Bank of Americas.
At that point, the question becomes, "Am I about to get a good deal or should I walk away from the idea of refinancing for right now?" So let me run through my list of six things I'm calling my Accepts, my Declines and my Sleep-on-it scenarios.
When it comes to my Declines, I have two scenarios that are pretty much always going to fit into this category.
Scenario number one: if your loan is moving from a fixed interest rate to a variable interest rate, your girl's going to say decline.
The problem with variable interest rates is that it does exactly what the name says: it varies. So this year the interest rate can be super sexy, but two years from now, The Fed could jack up the rate and your monthly loan payment goes up with it.
This makes it difficult to budget and plan your debt snowball because no matter how many experts will tell you the rates are going down, none of them actually know. So it's not uncommon for them to be wrong and the rates to go with the complete opposite direction. That's why I tell my clients to avoid this unnecessary risk by declining a refinance offer if they have to get a variable interest rate.
Scenario two requires you to look at the fine print on the loan to see if there are prepayment penalties. A prepayment penalty is when you're charged a fee - i.e. penalty - for paying the loan off early.
When you pay a loan off early, the bank loses out on the interest payments that you would have made over the life of the loan. So a prepayment penalty is their way of reducing or eliminating that revenue loss.
Now, if you like to use your tax refunds to pay off debt, or you're using your debt snowball to paid off... you should definitely be using that snowball by the way... that prepayment penalty is going to be a problem because it can easily reduce or eliminate any savings you would have realized.
That's why I always tell my clients to decline a loan payment that comes with the prepayment penalty.
My two Sleep-on-it scenarios exist simply because they're less cut and dry, and I highly encourage you to take a second and think about them... like overnight.
So for the first one, you have to go to the company's website to see if they have any protections for people facing financial hardships. Many of these organizations will have forbearance, deferment and even loan modification programs to help if something crazy happens, like a job loss... or a global pandemic.
I view this as an extra type of protection, kind of like your emergency fund, and personally, I would avoid companies that don't have them. But it's not exactly a deal breaker, so decide for yourself if it bothers you. Just be sure you know in advance because the last thing you want to do is assume they have the programs only to discover that they don't when you actually need them.
For the second one, we're back to that variable interest rate versus fixed interest rate discussion.
Typically I'm inclined to tell you to accept the refinance when it brings you away from the chaos of a variable interest rate to the stability of a fixed one. However, sometimes that stability comes with a price that includes total interest payments that are projected to be higher in the long run.
The problem is, once again, we have no idea what the variable interest rate is going to do. It could be slashed by The Fed, which would work in your favor, or it could go the other way, costing you thousands more in the long-run.
So since none of us have a crystal ball, it's not a decision that could be made quickly or lightly. That's why I encourage you to go home, do a little bit of research on what the experts expect, then sleep on it at least overnight before making a final decision.
Moving right along, we've come up to my two Accept scenarios. You like how it's kinda turned out where it's like two by two by two. I like it. I'm a geek.
Okay, so the first Accept scenario is frankly the most important one. It's when all of the math actually adds up.
When you refinance your loan, it's important to note three key numbers: how much interest you would have paid over the life of the original loan, how much interest you would have paid over the life of the new loan and how much the transaction costs and fees are for the new loan.
So, if the total interest on the new loan plus the transaction costs and fees are significantly less than the total interest you would have paid on the old loan, then the math actually adds up. Ultimately you're saving money, which is the entire goal of refinancing the loan.
That being said, you have to figure out what you consider to be significant. For me and my family, we're not rolling out of bed for anything less than a few thousand dollars, but for you, your budget, it might actually make sense to refinance the loan, if the savings are even just a few hundred.
Now the second Accept scenario, and the final one we're covering on this list, is when you're facing an impending balloon payment that you simply can't afford. A balloon payment is a giant payment due at the end of the term of a loan.
In a typical loan your monthly payments covered the entirety of the principle and the interest due on the loan by the last day. But loans with balloon payments don't do that because you're opting for a smaller payment over the life of the loan and a large one-time payment, or balloon payment, at the end.
Now, if you're about to hit the balloon payment and you haven't saved up enough to cover it, refinancing is typically your best bet. It can save your credit score and keep you out of court.
Alright, we covered a lot in a little bit of time, but hey, you made it. At this point, I think you're ready to figure out if or when it's time to refinance your loans. Trust me. I know it can be a harrowing decision, but if you do it right, remember, you'll save a ton of money and speed... speed up your debt snowball in the long run.
Now I recognize that there's some of you who are still gonna feel a little bit shaky, but I'm... I'm here for you. I got you, okay? Let's get on the phone and have a Rapid Strategy Consult. We'll dive into your new unique circumstances and we'll figure out which is the best route for you.
And the best part is, it's completely free. You don't have to spend a dime.
So to schedule your Rapid Strategy Consult, click the link in the description or head to my website at tianabclewis.com/bookonline, scroll down to Rapid Strategy Consult, follow the prompts so you can get your session scheduled and boomtastic, you're done. You don't even have to enter a card number.
Now that you know when you should refinance your loans and how to get some one on one help, if you need it. Let's get connected on social media. You can find me on Instagram and Twitter with the handle tianabclewis or on Facebook at selah financialcoaching. You can typically find me on any of those platforms, sharing money tips, sharing links to resources, or commenting on the economy.
Also, don't forget to let me know that you found this video useful, so I know to make more just like, it by hitting the thumbs up and following my channel. Don't forget to hit the bell, so you're notified each week when I drop brand new money tips and strategies.
Finally, if you're looking for more information , that's going to help you pay down those debts faster, whether you refinanced or not, these two videos are exactly what you need.
Now with that, you get to watching those videos and also you next week. Bye bye.
To refinance or not, that is your question if you want to lower your monthly payment. Some people say never refinance, others say there are major benefits of refinancing, so you’re left asking “Should I refinance.” And even if you do decide to refinance your loans, you’re still wondering when to refinance! We’re breaking down the pros and cons of refinancing, plus answering the question “should I refinance now or wait?”
Still feeling shaky on whether refinancing is right for you? Or maybe you have another question. Worry not! Let’s hope on the phone for thirty minutes to map out the right game plan for you. Oh… and did I mention it’s on me! Schedule your Rapid Strategy Consult today:
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