Part 3 of 3 Parts: Equal The Financial Playing Field With Financial Literacy 2
Refinancing and Re-Amortizing
Understanding the difference between refinancing and reamortizing a loan when it comes to managing your credit and cash flow is very important. Why? Because both are "important" tools for managing your finances. When used properly, they can be used to reduce debts, lower payments, and increase credit scores. These two strategies are overlooked or not understood by most consumers, thereby costing them thousands of dollars.
What is Re-amortizing a loan?
Re-amortization or recasting is when the lender readjust loan payments based on a lower loan balance. Note: The interest remains the same. Re-amortizing may save money opposed to refinancing which may entail paying fees since re-amortizing doesn't involve a new loan and can be a good option for borrowers with cash flow or debt ratio issues.
EXAMPLE: You financed a new car two years ago for $30,000, down payment $5,000, balance $25,000 @ 6.50% for five years, monthly payments $500.00. Balance after 24 payments $16,000. Assuming you are able to re-amortize the loan: $16,000 @ 6.5% for 4 years $380.00 monthly, saving approximately $120 monthly / $1,440 annually.
Conclusion: Monthly payment dropped by $113, saved $1,440 per year (4 years $5,760), decreased your debt to income ratio, and saved on iterest because of the lower balance.
This can be accomplished with any installment loans, i.e., homes, personal loans, automobiles, etc.
What is Refinancing a loan?
Refinancing is when a borrower pays a down a loan and reapply for a loan based on the lower balance. Note: The interest and terms changes and ther may be fee associated with refinancing. Refinancing may save money opposed to refinancing which may entail paying fees since Refinancing doesn't involve a new loan and can be a good option for borrowers with debt ratio issues.
EXAMPLE: You financed a new car two years ago for $30,000, down payment $5,000, balance $25,000 @ 6.50% for five years, monthly payments $500.00. Balance after 24 payments $16,000. Assuming you are able to refinance the loan: $16,000 @ 7.5% for 4 years $387.00 monthly, saving approximately $113 monthly / $1,356 annually. Assume a 3% loan processing fee $480 minus $1,356 you saved $876 in addition to paying off the original loan which for credit reporting you paid off a $25,000 LOAN EARLY.
Conclusion: Monthly payment dropped by $113, saved $876 per year (4 years $3,504), paid off old loan, and started new credit, and decreased your debt to income ratio.
This can be accomplished with any installment loans, i.e., homes, personal loans, automobiles, etc.
Which is best for you will depend on your persoal goals and ojectives and your overall financial situation. Either way you will win.
TIP: Any financial institution can refinance a loan, but orignal lend want to keep you business if you are a good customer. Shop other lenders for better interest rates, fees, and terms, they want new customers.
In my next post : Good Credit, The Financial Equalizer