Many people are drowning under a load of debts from different banks or financial institutions. This may have been caused by negligence on the part of the borrower. By this we mean either not reading the fine prints of the loan agreements or terms and conditions or not diligently paying off debts as at when due.
Most times people in dire circumstances do not take out enough time to research best interest rates before they agree to the terms and conditions of a loan. All they are thinking of is getting the money to meet the need. Sometimes however, the interest rate as at the time of taking out the loan may have been generally high; but now you see an option(s) with lower interest rates and better terms.
When such a situation arises the best thing to do is refinancing your loan. Refinancing is getting a new loan with better interest rate to service an existing debt. Other benefits of refinancing include getting a loan with longer duration for repayment. This means the borrower gets to make lower monthly payment.
In this article, we would look at factors to consider before refinancing and how you can get the best out of it.
Factors to Consider before Taking out Refinance Loan
One of the most common loans that people seek to refinance is usually mortgages. So we would discuss factors to consider before taking out a home refinance loan. But note that some of the factors addressed here can give you an insight for any other type of refinancing.
Note that the decision to take out this loan is a life changing one. Yes we say ‘life changing’ because it can affect many years of your life. Some people have fallen upon hard time due to this decision and some have come out of sticky situations due to this decision. Now on to the factors to consider:-
Why do You Want to Refinance?
For most people, the major reason for refinancing is to getter lower interest rates and better terms. There are however, more reasons why people seek out this option and they include the following:-
- Flexible loan with more features
- A credit that has lower monthly repayment
- Debt consolidation
- Using the equity to finance other major projects
- Economic status has changed thereby warranting the need for either longer or shorter loan repayment duration.
Whatever the reason, ensure that they would be beneficial to your overall financial situation and not dig you deeper into debt. This cannot be a frivolous decision.
We dare say that the most important factor that people consider before taking out this loan is the prevailing interest rates. Everyone wants to get better terms and interest rates for their refinance loan. Note that the slightest different in interest rates can culminate into a huge difference running into thousands more than expected.
A good number of homeowners are stressed because a significant portion of their income goes into mortgage. So you need to ensure that the interest rate of the new credit would reduce the stress and not increase it.
Your Credit Score
Most people only bother about their credit score when they are planning to buy a home or take out a loan for some projects. But the truth of the matter is that you need to maintain a good credit score at all times. More importantly, if you want to refinance your home, you need an average score of 620 on the FICO credit score rating.
If you do not have up to this score, you should consider building it up before applying for a refinance credit.
The Value and Equity of Your Home
It is essential to have a good equity on your home before thinking of refinancing it. The equity of your home is the difference between how much your home is worth and how much you still owe on your mortgage.
For those whose homes have increased in value, the Loan-to Value ratio is lower. This means that you have a higher equity on your home and therefore stand a chance for better terms, interest rate and higher amounts available for borrowing.
There are equity calculators online that can help you calculate the equity on your home. If you are more of an analogue person, you may want to consult a financial advisor for more clarity.
Cost of Refinancing
It would be naïve to think that this option wouldn’t cost you anything. There are different fees to be paid depending on the lender that you are considering. Some of these fees are valuation fees, discharge fees and origination fees, tax fees, underwriting fees; there could be more.
People on a fixed home loan may have to pay some fees up to the tune of a couple of thousand dollars to refinance. For people who are financially savvy, you may calculate the fees and how much you would save compared to what you are paying at the moment. However, for those who are not financially savvy, financial advisors are there to guide you.
Factors that Can Help You Get the Best Out of Refinancing
From the foregoing, we can see that refinancing is not something that you just jump into because you like what you think it entails. There are many factors that determine whether you would get the best out of this process or not. These factors include the following:-
Once you start thinking of getting another loan to offset the one(s) you have, it is necessary to do your due diligence. The first step is to check out options from different financial institutions and banks. Thankfully there is a proliferation of these lenders all over the place.
Many of these institutions offer refinance loans, therefore you as a customer are at an advantage. You are not boxed into a corner; you have several options to choose from. You may want to talk to your current lender to see what they can do for you in this regard. But if you do not get a favourable response, expand your search.
Ensure that you check out which lender can offer the lowest interest rates and have the best terms and conditions for you. Other things to look out for in the course of your research include the following:-
- Great Customer Service– The organization that you choose for this refinance credit must be one with great customer service. Communication is very important in any human endeavour. If you pick an organization with poor customer service, you might end up frustrated.
- Ease of Processes – Check out how easy their processes are; from enquiry, to application and other interactions. If you are dealing with an online institution, ensure that their site is easy to navigate and the processes have instructions that are easy to understand and not stressful to carry out.
Find the Best Fit for You
In the course of your research, you would come across different banks/financial institutions. Bear in mind that they all have different specializations. Therefore you need to find a bank that specializes in the area of your need.
There are banks that specialize in providing refinance loans for high consumer debts. They may not be a good fit for refinansiering av lån lav rente (low interest loan refinancing). Additionally, they may not also work well for credit card debts.
Talk with a financial advisor and find out which lender would work best for you.
Submit Applications to Different Banks/Financial institutions
We mentioned earlier that the proliferation of organizations that offer this service is an advantage to customers. To make the most of this advantage, you have to submit applications to several of them. This way, you would be able to get a comparative analysis of the interest rates and the terms and conditions.
Remember that your application must be uniform for all the organizations. Your request must be for the same sum of money to be repaid in the same duration. Only then would you be able to get an accurate comparison.
Get a Co-Applicant
One of the ways to get the best of refinancing is to apply with a partner or spouse. It is only logical for lenders to approve credit that’s co-signed. The risks are lower which leads to a reduced interest rate.
Settle Smaller Debts First
If you have smaller debts, it would work in your favour to pay them off first before applying for refinance loan. When potential lenders check your credit record, they would see that you are someone that endeavours to pay off debts.
One attribute that makes a borrower attractive to a financial institution is the willingness to offset debts. So by paying off smaller credits, you position yourself to get more credit with better terms and interest rates.
From all that we have discussed in this article, you can deduce that refinancing is a process that takes time. It is not something that you do on a whim. When carried out properly, you stand to gain a lot from it. But if one gets into it unadvisedly, it may lead to financial woes.
We hope that you utilize the information in this article to get the best of refinancing.