Refinancing for a Lower Rate

Getting a lower interest rate is a common reason for refinancing.
i Creatas/Creatas/Getty Images

Refinancing a loan to a lower interest rate can save you money. A lower interest rate means a lower payment each month and less to pay in interest. While a refinance may sound enticing right now, keep in mind that lender requirements have tightened, making it tougher to qualify. Good credit, increased equity and putting more money down increase your chances.

Mortgage Loan Refinance

Unless you currently have at least 20 percent equity in your home, your lender will require that you get private mortgage insurance when your refinance. That adds to the cost of your monthly payment. You also will have refinance fees, so consider whether you plan to remain living in the home for as long as it takes to recover the costs. If you have a second mortgage or home equity line of credit, your lender may require you to pay off that debt before refinancing. In addition, you generally need a credit score above 720 to qualify for the lowest interest rates.

Auto Loan Refinance

Like a mortgage loan, refinancing an auto loan may incur fees. However, if you are having money problems, refinancing offers you the option of increasing the term of the loan and lowering your monthly car payments. Your lender will consider how old the vehicle is at the time you refinance as well as how much money you still owe on the original loan. An interest rate a point or two below the rate you are paying now could save you paying hundreds of dollars in interest each year.

Consolidating Student Loans

When consolidating federal student loans, the interest rate you pay is an average of the rates on all the loans you are consolidating, but you will get a fixed interest rate and your credit score doesn’t have to be the best to qualify. If you have private student loans, you can take advantage of lower interest rates by consolidating with other private loans. The catch is the interest rates for private student loans are usually variable, which means the rate could increase over time.

General Refinance Tips

You don’t necessarily have to refinance with your current lender. Although your lender may reduce or not charge you refinance fees, you might be able to get an even lower interest rate elsewhere. Shop around, but do it within 30 days so that the multiple credit inquiries don’t drag down your credit score. Generally, when you rate shop, credit scorers will treat the inquiries as a single inquiry. It's also a good idea to pull your credit report yourself before applying for a refinance loan. Knowing where you stand will give you an idea of the rates lenders will offer you.

the nest