Refinancing Explained: When Does it Make Sense?

You’ve probably heard the term refinancing come up when interest rates are in the news. But refinancing isn’t just something homeowners consider. Really, it can apply to auto loans, too. In simple terms, refinancing is replacing your current loan with one that fits your financial situation today.

For some people, that could mean lowering a monthly payment. For others, it might be reducing their interest rate or adjusting their loan timeline.

At Red Rocks Credit Union, we believe the goal of refinancing is simple: help your loan work better for your life as it is now. Below, we’ll walk through when refinancing tends to make sense (and when it might not), so you can decide whether it’s worth a closer look.

What Refinancing Means

Refinancing can sound complicated, but the idea is pretty straightforward. When you refinance, you replace your current loan with a new one. The new loan pays off your existing balance, and going forward, you make payments on the new terms instead.

Those new terms are where the potential benefits come in. Depending on your situation, refinancing could change your interest rate, monthly payment, loan length, or a combination of all three.

Refinancing isn’t limited to one type of loan, either. Many homeowners refinance their mortgages to match their current goals, and many drivers refinance auto loans to try to lower their rate or payment after their credit improves.

The big picture: refinancing is a tool to help your loan fit your life better than it did when you first signed the paperwork.

When Refinancing Makes Sense

Refinancing isn’t something you need to do on a schedule. It tends to make the most sense when something in your financial picture has changed or when a new loan could support your goals. Here are a few common situations where you’ll want to ask our team about refinancing.

Rates Have Dropped

One of the most well-known reasons to refinance is when interest rates fall below what you’re currently paying. A lower rate can reduce your monthly payment and, over time, decrease the total interest you pay on the loan. This can apply to both mortgages and auto loans, depending on market conditions and your qualifications.

You Want a Lower Monthly Payment

If your monthly budget feels tight, refinancing could help create some breathing room. By extending the loan term or securing a lower rate, you might be able to lower your payment to something more manageable. Just keep in mind that stretching out the loan can mean paying more interest over the long run!

Your Credit Has Improved

A boost in your credit score since you first financed your home or vehicle means you could now qualify for better loan terms. This is especially common with auto loans and newer mortgages. Even a small improvement in your rate can add up to meaningful savings over time.

Pro Tip From RRCU: Haven’t reviewed your HELOC in a while? Compare your current rate and credit line with what you might qualify for today. You could have more flexibility than you think.

When Refinancing Might Not Make Sense

Refinancing can be a helpful tool, but it isn’t always the right move. In some situations, the costs or timing could outweigh the potential benefits. Taking a closer look at your full picture can help you avoid making a change that doesn’t serve your goals.

For example, if you plan to sell your home or trade in your vehicle in the near future, refinancing may not give you enough time to recover any fees or closing costs. Mortgage refinances in particular can come with upfront costs, so timing matters.

You’ll also want to pause if your current interest rate is already competitive. Even if you can secure a slightly lower rate, the savings could be minimal once fees and the new loan timeline are factored in.

Another consideration is the length of the new loan. While extending your term can lower your monthly payment, it can also keep you in debt longer and increase the total interest paid over time. The lower payment can feel helpful in the short term, but it’s important to weigh the long-term impact.

Pro Tip From RRCU: Ask your lender to show you both the monthly payment change and the total interest over the life of the loan. The lowest payment isn’t always the lowest overall cost.

Find the Right Refinancing Fit

Refinancing works best when it’s tailored to your goals. Whether you’re looking to lower your monthly payment or simply explore your options, having the right team in your corner can make the process much easier to navigate.

At Red Rocks Credit Union, we take a personalized approach to refinancing. Our team can help you review your current loan, run the numbers, and understand the potential savings for both your home and vehicle.

And in many cases, members can complete the process quickly, sometimes in as little as 24 hours.

The best way to know if refinancing makes sense is to look at your real numbers, and we’re here to help you do exactly that!