The Difference Between Mortgage Refinancing and Auto Loan Refinancing that Everyone Misses

Mortgage Refinancing vs. Auto Loan Refinancing: What’s the Difference?

Let’s play a word association game. Quick, what words first come to mind when you hear the word “refinance”?

If you’re like most people, you likely thought of something related to a mortgage or house. That’s because many consumers don’t even know that other forms of refinancing exist. In fact, auto loan refinancing is one of the furthest topics from the typical car buyer’s mind, even if it could save them money on their car loan.

Today we’re going to examine the differences between auto loan refinancing and mortgage refinancing. That way, you’ll be better prepared to understand both types when you’re presented with a refinancing opportunity.

Auto Loan Refinancing Is Different From Home Refinancing. Here’s How.

It’s generally easier to refinance an auto loan than a home mortgage. For one, there generally aren’t any penalties for paying an auto loan off early, so refinancing — in which the new lender pays off your old loan and begins a new one to cover the costs — will have a minimal impact on your outstanding balance.

Unlike a mortgage refinance, which could include thousands of dollars in out-of-pocket fees, there are usually no appraisal fees, title search fees, or similar upfront closing costs associated with an auto loan refinance. Refinancing an auto loan can incur fees, but they generally cost less, and they are typically included in the finance charge.

For those individuals who just want to put themselves in a better financial position on a month-to-month basis, an auto loan refinance might be the best option since it is often a quick way to lower your payments.

Should You Refinance Both Your Home and Your Car?

Unless your financial situation is dire, it is probably not a good idea to refinance both your home and auto loans at the same time. 

Refinancing your mortgage or your auto loan will likely result in your credit score taking a brief dip. Opening new lines of credit, even in cases where you are refinancing and replacing a current line of credit, will always impact your credit score in the short term.

Instead, consider this strategy: Refinance either your mortgage or auto loan, then use the savings to make a number of payments as you wait for your credit score to bounce back. Once you improve your credit score, you can use it to refinance your other loan.

As for which one to choose, it depends on what you hope to get out of it:

  • Do you want to get cash out of the loan to pay off other debts? Go with a home mortgage refinance.
  • Are you planning to remain in your home for a number of years, so the reduced payments or interest rates will make a difference? Go with a home mortgage refinance.
  • Are you in danger of not being able to pay your monthly bills, especially your car payment? Go with an auto loan refinance.
  • Do you want to pay your vehicle off faster? Go with an auto loan refinance.
  • Have interest rates improved significantly since you purchased your car? Has your credit improved significantly? Be sure to consider both.

These are just a few broad test cases. Every situation is different, so it is worth sitting down with a professional to examine your own financial needs before determining which path is best for you and your family. Both types of loans can provide significant relief on a monthly basis.

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