If you’ve never experienced debt before, you probably don’t know about refinancing. This ingenious strategy was invented by financial institutions to offer struggling folks better opportunities. In short, it replaces an existing loan with a new one to get better conditions. This happens because things in the finance world are constantly changing.
What seemed like a good idea in the past may not sound as good now. Let’s say you got an excellent interest rate when you applied the first time. You’ve already almost repaid half of your debt. But in the meantime, your bank started offering more favorable loans, with lower interest and longer repayment periods.
It’s perfectly natural for you to want to upgrade, so you sign up for refinancing. More and more people are using this convenient problem-solving method with excellent results, so it’s definitely worth considering.
Interest rates are not the only factor in choosing to refinance. Sometimes the only thing you need is to extend the repayment period. In any case, it always helps to be on the lookout for new and better deals. Find out more relevant information on this page https://www.valuepenguin.com/loans/refinancing-a-loan-what-it-means.
The more research you do on the topic, the better understanding you’ll have about what it means to refinance and why it can solve a lot of your financial problems. Everything nowadays is digitalized, so finding out information will be pretty easy. Also, continue reading this article because we’ll cover the basics every person needs to be aware of.
Keeping Track of Cycles
The average citizen doesn’t spend a whole lot of time contemplating interest rates. They deal with it when they have to, and that’s it, unless they actually work in finance as a career. But having a general idea how rates work can help you a great deal in refinancing a loan. That’s because interest rates move in cycles.
These numbers may go up for a certain period, then suddenly drop for a while, and rise back up again. Many factors come into play here, like market competition, monetary policies, the economic cycle in general, and so on.
Let’s assume you’re planning to refinance in the summer. This is what a lot of people choose to do. All predictions indicate that rates will drop sharply in wintertime. Instead of rushing, you might as well wait only a few months and then apply for refinancing. You’d be surprised how much you could save in the long run just by following interest rate cycles.
This approach works very well for business owners in particular. They need to be extra responsible with finances, so it’s in their best interest to reduce unnecessary costs as much as possible. Once they check their eligibility and create a turnaround plan, they’re ready to refinance.
Can You Refinance a Mortgage?
Of course you can – in fact, it’s a very popular loan type in the US and other parts of the world. Americans are notorious movers, so they’re well-acquainted with house-related expenses. Using the refinancing method, you can grow the potential return of an investment.
And your house is precisely that. Securing a new loan is an excellent way to leverage that investment, plus you get better terms and conditions on the loan.
A mortgage loan can be a very flexible solution for your home. Let’s say you’re in the middle of a divorce process. Instead of dreading the outcome, you can take matters into your own hands. Refinancing allows you to remove (or add, if you like) individuals from the mortgage.
Or, if you want to use your house’s equity, you can always consider the cashing-out option. In general, a lender would ask you to pay 2%-6% of your total loan value. The best option is a no-closing-cost refinance, where you do pay anything extra.
However, home refinancing can be problematic for your credit score. When applying for a fresh loan, the old one will appear as a closed account in your report. Hence, your overall score might drop a little, thought only for a few months. In such cases, it’s best to discuss the matter personally with your lender.
Besides the obvious reasons for refinancing, lowering interest and altering loan terms, you might also want to change the type or program. For instance, you got an ARM (adjustable-rate mortgage), but to take advantage of current low rates, you want to move to a fixed-rate mortgage.
Or you chose to stop paying the insurance premium because you have enough equity. No matter your motivation behind it, refinancing your mortgage is always beneficial if you do it right.
More Than One Option
There are several different types of mortgage refinancing, depending on your needs. For all the homeowners out there, let’s look at three of the most popular offers.
The obvious one, of course, is rate and term refinance. We already explained how people use refinancing to improve existing loan terms and interest rates, and it’s the number one reason for people to take the refinancing route.
Next, you have the cash-out option at your disposal. It works in the following way. You already owe a certain sum on your first loan. Through refinancing, you get a new loan for a bigger amount than your existing debt. Finally, the difference between the first and second loan is what you get in cash.
Also, you have the cash-in opportunity. As a borrower, instead of taking out money from refinancing, you invest in it. This way, you get two important benefits: increasing home equity and lowering the loan-to-value ratio. Many homeowners lack equity, so cash-in refinancing allows them to reduce costs until they improve their condition.
A Practical Example
We can blabber infinitely about refinancing in theory, but you might learn nothing until you see a real-life example. Who knows, someday you could find yourself in the exact same scenario, so you’ll know precisely what to do.
A married couple have a 20-year mortgage with fixed rates. Five or six years into the repayment period, their bank offers a new interest rate – 3% instead of the previous 6%. A good kalkulator refinansiering will save you a lot of time with all these numbers.
Back to the couple: of course, they’re now willing to refinance to reduce costs. For the remaining fifteen years, the couple will save a lot of money by reducing monthly payments. And in the future, if a better rate comes along, they can always re-apply for refinancing.
As long as you comply with conditions in due time, refinancing is always on option. Lender respects loyal customers and are ready to accommodate them.