Debt is one thing that can cripple a person both financially and emotionally. Being in a cycle of debt is never a good thing for one’s mental health. How then can one get out of this vicious cycle? There are a number of options to consider.
You can get out debts by careful planning and sticking strictly to the repayment plan. You can also consolidate your debt or refinance it. Oftentimes, people interchange the use of ‘debt consolidation’ with ‘refinancing’ but there are slight differences in the two processes.
Although they can be defined differently, we will also be using the two terms to explain the process of merging small loans into one large credit facility or exchanging an existing loan with a new one with more favourable terms and interest rates. You can click here if you want to go into details of the difference between the two terms.
In this article, we will explore the basics of refinancing, the pros and cons and how you can make the best of it so stay with us.
What is Refinancing?
Also referred to as refi, this is the process through which an existing loan is replaced with a new one. Typically, the new credit agreement has better terms and conditions. These include lower monthly payment, lower interest rates, and different repayment duration. Refinancing commonly applies to mortgages; however, they can also be used for different types of loans like personal, student or auto loans.
The major objective of a refi is for the borrower to save some money over the loan duration. Another objective is to help improve the financial circumstances of the borrower. These objectives can be achieved by getting a lower interest rate so that the total cost of the credit will be reduced. Additionally by extending the repayment duration of the loan, the borrower can get to make lower monthly payments.
Refinancing may also be used by borrowers to switch their loan agreement from adjustable rate to fixed rate. This gives borrower structured stability on their monthly payment. Furthermore, refi can be used for debt consolidation by getting one loan to pay off several loans.
Reasons for Refinancing
There are many reasons why people take out a refi loan and they include the following:-
Lower Interest Rates
A refi loan offers borrowers the opportunity to get lower interest rates by accessing loans that have longer repayment duration and lower monthly repayments.
Reduced Monthly Payments
A lower interest rate and longer loan term which in turn translates into lower monthly payments. This provides more budget flexibility and free up money for other living costs or expenses.
Shorter Loan Term
People can choose to refinance their loans to a shorter duration. For example, they can switch from a 30 year mortgage to 15 years so as to pay off the loan faster and also save money on interest.
Cash-Out Refinance
A cash-out refi allows borrowers to leverage their home equity to get a higher amount than the balance on their mortgage accounts. They can also use the money for home improvement, debt consolidation or any other expenses.
Switching Loans
Some people refinance so that they can switch from ARM( adjustable –rate mortgage) to a fixed rate mortgage. This provides stability in the amount that they pay monthly and also protect them from inflation of interest rates.
Debt Consolidation
Refi can be used for debt consolidation which entails merging multiple loans into one lump sum loan to simplify debt management. This potentially saves money on interest paid.
Removing Private Mortgage Insurance (PMI)
A borrower with an increased home equity can decide to use that equity for refinancing and use that refi to remove Private Mortgage Insurance which in turn translates to lower monthly payments.
Change in Financial Status
The only thing that is permanent in life is change and this also applies to finances. Circumstances such as death, job loss, divorce or retirement can necessitate refinancing.
Improving Credit Score
Borrowers who are on the verge of getting a payment note or foreclosure can access a refi loan to consolidate their debts and manage high interest debts. This in turn makes their debts easier to repay and at the same time improve their credit score.
Harnessing Investment Opportunities
When people come across investment opportunities that require huge sums of money, they may seek refinancing on their mortgage to access additional funds.
All the above are reasons why people may want to refinance their debts. However, it is recommended that you consider the pros and cons of your decision. You might even have to consult a financial expert/advisor to be on the safe side.
You can visit this site https://besterefinansiering.no/hva-er-refinansiering for more information on refinancing.
Factors to Consider Before Refinancing
While we earlier said, it is necessary to do your due diligence to ensure that you are making the right decision. The following are some factors to consider:-
Interest Rate
You have to compare the interest rate on your current loan with the rates that are being offered on the refi loans. Be sure that the new rate is lower than the old one to the extent that it justifies the cost and fees that comes with refinancing.
Terms of the Loan
Make sure that you review the terms of the refi loan to be sure that it fits your desired objective. Consider the advantages of either shortening the duration of repayment or extending it. Shortening the repayment duration will enable you to pay off the debt quicker while extending will enable you make lower monthly payments.
Closing Costs
This has to do with the fees that come with refinancing which includes application fees, title search fees, appraisal fees and attorney fees. These fees can add up fast; therefore it is important to calculate whether you will recoup these fees and how long it will take based on the reduced interest rate or lower monthly payments.
Reputation of the Lender
The reputation of a lender determines whether the borrower will meet the financial goals and objectives desired with the refi. This is because a reputable lender will give you excellent customer service and support and also competitive rates that will make the refi worthwhile.
Additionally, there will be no hidden costs that will ambush you at the end of the day. Therefore take out time to make your findings about any refi option that you are considering.
Credit Score
Ensure that you know and appreciate how your credit history and score will affect your qualification for refinancing and the type of rates you will get. If you find out that your credit score is not good enough to earn you the type of rate that you desire, it might be best that you take a little time to build up your scores before applying for refi.
Other factors to consider include the equity position of your home, prepayment penalties (if they are included in the agreement) and your financial goals. You should also factor in the stability of lack thereof of your income and the current market conditions.
Conclusion
Refinancing is not a process that one should engage without due diligence. We have explored some reasons why people take out refi loans and shared tips on factors to consider so that you can make the best of this process. These tips shared will go a long way in helping you determine whether a refi is the way to go and if yes, how to go about it to get the best result.
