The following is meant as a general guide to refinancing, not specific advice on any or all persons’ unique financial situations. If you’re in the market to refinance, AAA is here to help you save from the comfort of your own home. To speak with a AAA loan consultant, visit AAA.com or call 1-800-793-0508.
It’s always good practice to review your loans annually to compare the interest rates you have versus the current market rates, as well as ensure the structure of the loans meet your current financial situation and goals. You could likely find that refinancing will save you money by lowering your monthly payments, shortening the length of your loan or both.
We asked AAA Northeast’s financial experts for tips on navigating the world of refinancing student, home and auto loans. Here are the factors they suggest considering before making a decision.
If you are one of the roughly 45 million Americans who have student debt, now might seem like the opportune time to try to get out from under it. However, make sure to consider the type of student loans you have.
As part of the CARES Act passed in March, federal student loan borrowers have automatically been placed in administrative forbearance. This means that they do not have to make their monthly payments. Additionally, the interest rate on all student loans has been dropped to 0%. Both of these provisions will remain in effect through September 30.
Since borrowers are not required to continue making payments, nor will they be penalized with any accumulating interest, it most likely will not be beneficial to try to refinance federal student loans at this time.
“If you have federal loans that have high interest rates you may want to take a look at what market rates are when we start to recover and return to normal,” says Donald Kerr, AAA Northeast’s Manager of Student Lending. “Right before the federal loans start to accrue interest would be a good time to look at market rates to see if you can benefit from low refinancing rates.”
Due to the recent economic impacts, interest rates on private student loans could very likely be lower than what borrowers were able to secure in the past. A lower interest rate would save you money and lower your payment.
If you need immediate relief, you could also increase the term of the loan in years, which will help to lower your monthly payment, Kerr says. “Most private lenders do not charge application or origination fees so if you extend the term of the loan now, you are not locked in and can always refinance again in the future back to a shorter term loan.”
The CARES Act provides relief options for those with federally backed mortgages. If you are experiencing financial hardship due to the coronavirus pandemic, you have the right to request a pause or reduction of payments for up to 180 days. You can also ask for an extension of an additional 180 days.
Borrowers must contact their loan servicers to request forbearance. You should also be aware that once the loan enters forbearance it will be ineligible for a refinance until the loan is brought current again.
You may also be able to receive financial assistance if you have a mortgage from other financial institutions, which have been encouraged by government agencies to work with borrowers who are unable to pay. Contact your loan servicer to see what options are available.
Refinancing your mortgage could be another option. “Generally speaking, if you can recoup the cost of a refinance within the first three to five years, it is worth considering,” says Steven Vieira, AAA Northeast’s Director of Mortgage Operations and Sales.
“If someone were to refinance today but planned to sell the home next year, they may want to explore a loan program that builds the costs into the interest rate. On the other hand, if someone is going to be in their home for a long period of time and wants to maximize their savings, then paying those costs upfront and getting the lowest possible rate may be right for them.”
While the savings are not as large as a mortgage refinance, an auto refinance can prove to be a long-term money saver.
“People are somewhat surprised when they find they may only save $5 or $10 a month, but over the course of five years it can add up,” says Ted Lyons, Director of Financial Services for AAA Northeast. “If you were walking down the street and saw $5 on the sidewalk, would you pick it up? Why let your bank keep it if you could put it in your pocket?”
AAA generally recommends a person refinance if they are saving money over the course of the remaining term. In some cases they may be able to keep the payment similar to what they had previously but could shave time off of the end of the loan, which still saves money over the lifetime of the loan.
Even in the short-term it can save you a few dollars, which during this time, is still significant. “People often take out a refinance to make the term longer, which in turn will lower the payment,” Lyons says. “While this does not usually save them money, it will reduce their monthly obligation freeing up valuable cash flow that may be needed for other things.”
Learn more about all of AAA’s financial service products. To speak with an AAA loan consultant right away, call 1-800-793-0508.