How Is Refinancing Different from Consolidation?
Consolidation and refinancing are two different ways of restructuring your home loan. Each has its own benefits, so it’s important to understand how each works and how they can help you.
Consolidation Can Provide a Lower Payment
Consolidation can provide a lower monthly payment, but it will not be as drastic as refinancing. With consolidation, you may get a lower interest rate or extend the life of your loan (which would then reduce your monthly payment).
Consolidating student loans can also mean combining two or more loans into one new loan. If this reduces the number of loans you have and lowers their total balance, it could help lower your monthly payment.
Consolidation Doesn’t Always Lower Rates
Consolidation also has benefits beyond reducing your monthly payment. It can lower the interest rate on your loans and even pay off the loan more quickly.
Consolidation can reduce the amount of time you spend paying off your student loans by reducing the total amount paid in interest over time, which may allow for an early payoff or a longer repayment term if necessary.
Refinancing Offers Potential Savings
Refinancing offers a lot of potential savings:
- Lower interest rate and monthly payment. If you can lower your interest rate, you’ll pay less for the loan each month. This is especially beneficial if you pay more than 10% interest on your current mortgage.
- Shorter loan term. You can shorten the length of your loan by refinancing into a shorter-term mortgage, reducing the number of monthly payments in your life cycle. If you’re planning on retiring soon, this could be an attractive option when combined with lower interest rates that make the loan more affordable overall.
- Consolidate multiple debts into one monthly payment (or two). Refinancing is often considered alongside consolidating other debts because they both offer similar benefits: reducing monthly payments and lowering overall debt levels by extending the time between payments or eliminating them altogether!
Refinancing Can Make It Easier To Manage Your Loans
Consolidation is an excellent option if you have multiple loans and want to simplify your finances. You may not realize it, but you can consolidate credit card debt into a mortgage or even combine multiple student loans into one loan with a lower payment. This can make managing your money much easier, especially if you need help keeping track of bills and payments.
According to SoFi, “Through refinancing your loans, borrowers receive a new interest rate, based on their current financial picture.”
Not only that, but refinancing can help you lower your interest rate or even pay off some of the principal on your loan early without penalty—something that would be impossible if you were consolidating instead of refinancing.
Now that you know the difference between refinancing and consolidation, it’s time to ask yourself if one or the other is right for you. If you have questions about either option, many resources are available online. Remember that refinancing and consolidation are tools that can help anyone improve their finances by reducing debt payments and ensuring they’re getting the best rates possible on their loans.
