Post-college life

Should You Refinance with a Fixed-Rate or Variable-Rate Loan?

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Post-college life

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When you think about your student loans, your balances and monthly minimum payments are probably the first things to come to mind, but there's one other hugely important detail that tends to get overlooked—interest rates. They may not always be top of mind, but they're crucial to determining how much you'll end up paying.

You can think of an interest rate as the amount you're being charged to borrow money. It's based in part on the borrower's creditworthiness and overall financial health, then tacked onto the monthly payment. The higher the interest rate, the more expensive the loan.

Let's pretend you have an $80,000 student loan on a 10-year repayment timeline. A 7-percent interest rate means paying $31,464 in total interest. Now let's run the same numbers, but with a 5-percent loan. In this case, you'll save over $9,600 by the time you're done. You can plug in your own numbers with this simple refinancing calculator.

This is precisely why it makes so much financial sense to refinance your student loans. (This is when you take multiple student loans and bundle them into a new, lower-rate loan.) If you're currently up against high-interest balances, it's a move that could potentially bring about big savings. Refinancing puts the borrower back in the driver's seat because you can customize your experience—it's the opposite of a one-size-fits-all approach.

This brings about one big question, though: Is it wiser to refinance with a fixed-rate loan or one with a variable rate? Let's take a closer look at each.

Fixed-Rate Loans

A fixed-rate refinance loan makes budgeting really easy because your monthly payment and interest rate both stay the same over the life of the loan. That means you know exactly what you're getting each month because your loan is unaffected by market conditions—no surprises.

This type of loan is especially appealing for those who prefer taking a set-it-and-forget-it approach to managing their money because there are no curve balls ahead. Fixed-rate loans are ideal if you find yourself refinancing during a period where interest rates are heading upward.

Variable-Rate Loans

Variable-rate loans are a little different in the way they're structured. Ever-changing market conditions influence the interest rate here, which means both your rate and monthly payment will likely fluctuate over the course of the loan.

This setup comes with some key benefits, though. For starters, an initial lower rate is the norm, making variable-rate loans cheaper from the get-go. And if you refinance during a time when interest rates are predicted to head downward, you're more likely to keep more money in your pocket over the long haul. Rates could, however, end up rising at some point. With that said, a variable-rate loan might be your best bet if you have a shorter repayment period—so you'll be all paid up before your rate gets the chance to fluctuate too much. In other words, time is of the essence.

Hybrid-Rate Loans

Hybrid-rate loans are exactly what the name implies, rolling the benefits of fixed-rate and variable-rate loans into one. CommonBond—the first company to bring the idea to student lending—offers hybrid rates that are fixed for five years before converting to variable for the remainder of the term.

These kinds of loans are unique in that they offer the best of both worlds. You get to enjoy the initial variable-rate perks without leaving yourself vulnerable to potential interest rate spikes over the long term. If you're looking at a 10+ year repayment timeline, a hybrid-rate loan is especially attractive for this reason. Plus, the fact that it switches to a fixed rate makes budgeting easier and allows you more financial predictability.

At the end of the day, the type of refinance loan you go with is an individual choice. If you've got a shorter repayment timeline in place, or if national interest rates are on the decline, a variable-rate loan is wonderfully dynamic. Those who find themselves up against a high-interest rate environment or who have longer loan terms may make out best with a fixed-rate or hybrid-rate loan. Either way, it's better than sticking with an original high-rate loan. Those looking to save even more money can also see if their lender offers any additional discounts for enrolling in autopay.

Navigating the refinancing waters needn't be tricky. Ready to take control of your student loans? CommonBond makes it easy—and doesn't hit borrowers with origination fees or pre-payment penalties.

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