Just like any other type of loan, when you refinance a loan, you also have an annual percentage rate that will apply to your loan as a yearly interest rate. However, when you refinance a loan, oftentimes you can also renegotiate the annual percentage rate attached to the loan, otherwise known as the APR.
The annual percentage rate, or APR, on your refinance loan impacts how much your monthly payments will be and, in some cases, how long the term of your loan will last. An APR is a finance charge added to the balance of a loan, also known as the principle. Another way to think about an APR, or interest rate, is as the cost of doing business with a loan lender. Unfortunately, borrowing money is not typically a free agreement.
However, the amount of APR you are charged for your loan depends on multiple elements.
For example, one of the factors that can influence the APR that your lender asks for is your FICO score. Depending on what your FICO score is will have a direct impact on how much interest you are charged. A FICO score is essentially the same thing as a credit score. It is a three-digit number that represents your credit health that will indicate to potential lenders and other creditors how much of a risk it is to loan you money.
The way a credit score or FICO score impacts the APR lenders will offer you has to do with the health of your credit. If you have healthy credit, the lender will view you as a safe recipient of the loan who will pay on time and in full. If your credit health is not great, then the lender might view you as a risky customer. So, do you have good or excellent credit? If so, expect a moderate to low APR. Do you have poor to bad credit? If so, you can unfortunately expect a significantly higher APR.
APRs also function as a way for lenders to make money on funds they no longer have in their possession. Money in lender accounts generates interest. When they loan that money to you, they lose the ability to earn interest on their funds. Therefore, APRs are:
- A service charge for doing business.
- A recoupment of lost interest.
- A reward for the risk a lender takes on you and your needs as a borrower.
Refinance loans, like many other personal loans, are categorized as two main types. A loan refinance is either secured by collateral or unsecured.
Secured loans require collateral to guarantee the repayment of the loan funds in the event of an emergency, death or default. Unsecured refinance loans do not require collateral and often charge higher APRs because of it.
The best mortgage refinance companies offer great APRs and friendly terms because they use the borrower’s house as collateral.