“Almost nobody should refi their federal loans,” says Betsy Mayotte, founder of The Institute for Student Loan Advisors, an organization offering free student loan guidance. “The only people who I recommend doing that are those who have a very strong emergency fund, there are multiple income generators in the household, and their payment is really affordable to begin with,” Mayotte says.
DEFINE YOUR GOALS
Finally, ask what you want out of a refinance. “A lot of borrowers are looking to pay off their loans faster,” Thomas says. “Their monthly payments may go up, though. Then some borrowers are looking to lower their monthly payment overall by lowering APR and extending their loan term.” If you want a lower payment, make sure you look at the overall financial implications. A higher APR, longer loan term or both mean you’ll end up paying more in the long run. Here’s how that breaks down: Say your current balance is $30,000, with a 7% APR and 10 year term. If you get a refi deal with a 5% APR and kick out the loan term to 15 years, you’ll save $111 a month — but will pay about $900 in additional interest. If you’re looking into refinancing because you’re paying off federal loans, you have other options such as income-driven repayment plans and extended repayment plans. Those can make monthly payments more manageable, but again you’ll pay more in the long run due to a longer loan term.
SURE ABOUT REFI? MAKE YOURSELF LOOK GOOD TO LENDERS
So you’ve done your homework and determined that refinancing might be a good option for you. Before you apply, make yourself look even better to lenders. Thomas says the lowest credit scores lenders will accept for
a refi deal will be around 640 to 680. But you’ll likely get the best deals with a score of 720 or higher. And lenders may want to see two years of on-time payments on your existing loans. If needed, spend some time building your credit and extending your record of on-time payments. And hedge expectations created by the glossy mailers. “Unless you’re the cream of the crop, the advertised rate is probably not the deal you’re going to get,” Mayotte says.
Unless you’re the cream of the crop, the advertised rate is probably not the deal you’re going to get.
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