Have you heard of refinancing but can’t say for sure whether you have a full understanding of it? Do you have an existing loan that you’re struggling to pay off because of its high interest rate? If so, then refinancing may just be what you need to help get you out of this debt.
Refinancing simply means taking a new loan with better terms to repay your existing debt with unfavorable terms. Refinancing is much sought after because it offers benefits such as better rates, lower monthly payments, and better repayment terms.
Knowing how important it is to refinance debt, it is vital to understand what this means and how it can help you. You also need to understand how to choose a reputable lender for this. In this article, we will be discussing some of these important things that you need to know about refinancing a loan. Let’s begin!
Ways to Refinance Your Loan
It is important to state here that there are different types of loans that can be taken to refinance an existing one. The important thing is that the new loan has to have much lower terms than the loan to be refinanced. It’s also important to state that there are different ways to go about refinancing a loan.
This is a good fit for refinancing high-interest debts because it is pretty easy to obtain with good terms if the applicant has good credit rating with the lender. With a poor score, you are still likely to get the loan but on far less favorable terms. This will mean that it won’t serve as a viable refinancing loan. You should therefore work on improving your credit rating before applying for this type of loan for as a tool for refinancing. If you don’t know how to go about this, you can read up on how to improve your credit score before making a decision.
The following are some of the benefits you get when you refinance with a personal loan:
- You may be able to consolidate your debts into one single payment
- You can get much better terms with a good credit score.
- It is mostly unsecured so you don’t need to pledge collateral to get it
- You can repay the debt directly from your salary
Here are some of the cons of taking a personal loan:
- This may come with some penalties which may include a prepayment penalty. This is given when you repay your debt earlier than the due date.
- Wrongly used, it can increase your debt profile.
Home Equity Loan
This is another way you get some cheap finance to refinance your debt. Your home’s equity refers to the difference between the monetary value of your property and the mortgage debt on it. You can borrow on this equity to refinance your debts. Home equity loan is a lump sum of cash given to you and because it is secured on the home, it is usually comes at a low-interest rate, making it perfect for refinancing.
Here are some of the benefits of borrowing home equity cash:
- If your home equity is high, you will have a lot of money to borrow.
- It usually comes with low-interest rates
- You can also pay low monthly debt payment
- It has a fixed repayment duration
The following are some of the cons:
- You place your property at risk of foreclosure.
- Closing costs might be costly.
- If your home’s equity should drop, your mortgage debt will increase.
A Balance Transfer Card
This is used to refinance expensive credit card debt balances. The cards will usually come with an introductory interest rate of 0%. With this interest free introductory period, you can transfer your credit card debt and enjoy interest-free financing while the introductory period lasts. With this, you’ll be able to make some of your monthly payments without paying interest. No doubt, this will help make your repayment a lot easier.
The following are some of the benefits you can enjoy from this:
- The initial 0% interest rate and subsequent low rates means you can pay off card debt balances more easily
- It can be used to transfer high-interest card debts
- You can get it easily from many online lenders
The following are some of the downsides:
- The 0% interest is for a short period
- You might pay a lot to get the card
A 401(k) Plan
A retirement account is one of the ways to refinance your expensive debts. You can borrow from the account to pay off your debts at better rates. A loan from your 401(k) doesn’t affect your credit score. It should however never be your first option because you’re borrowing from your retirement funds.
The following are some of the benefits of a 401(k):
- Your credit score is not affected
- The interest rate on a 401(k) loan is less than some other methods
- The lending process is easy and stress-free
- You can’t borrow more than 50% of your retirement funds
Here are some of the downsides:
- You must have a retirement fund to borrow from it
- You might be left with a low retirement funds when you retire
- If you leave your current place of work or get sacked, you will have to repay the debt or you will be fined
- You might end up paying taxes twice. First is when you take a loan from the retirement account and the second is when you start withdrawing from your IRA
Reasons Why You Should Refinance Your Expensive Loans
The following are some of the reasons why you should do this:
A Lower Interest Rate
This is the first reason why many folks decide to go for loan refinancing. With a much lower interest rate, you can make lower monthly payments and even renegotiate the term.
Consolidation of Debts
Do you want to consolidate your existing debts? Then, refinancing can help you achieve this. If you would like to know more about how it does so, check here refinansieringmedsikkerhet.com/ for help. You need to understand that refinancing does not always involve consolidation.
To Save Money
When you refinance your existing loan with a better one, you make lower monthly payments which translate to some savings each month. This wouldn’t have been possible with your old debt.
Improved Credit Score
If you keep making your payments on time, you’ll continue keep improving credit score. A carefully selected low interest loan will make it easier for you make these monthly payments. This is because what you’ll need to pay monthly will be reduced.
When you refinance, you are getting a loan with better terms than your existing one. These terms come with a low rate of interest, lower monthly payments, and better repayment duration.
How Can You Qualify for Refinancing
So, how do you qualify for this type of credit facility? The following are some of the important requirements a lender will ask from you:
Low Debt-to-Income Ratio
This is one of the things a lender will check before offering a loan to you. If you have too much debt, a lender will be less likely to consider your application. So make sure that your debt-to-income ratio is not more than 30%.
A Good Credit Score
Having a good credit rating is essential, especially if you want to get really good rates on the offers you get. Experts recommend a score of 670 and above to ensure you get the best rates. Remember that even with low credit ratings, you can still get a loan but with much higher interest rates.
Your Financial Status
It is possible that when you took your existing credit facility, you had a poor financial status. Now, you probably earn better than before and want a better loan. Lenders will confirm that your financial status has improved and that you can make monthly payments on the loan before lending you the funds.
How to Choose a Lender for Refinancing
Here are some important steps to take before choosing a lender:
Research the Lenders
You can choose to refinance with your existing lender or choose a new one. If you decide to go for a new lender, make sure you choose wisely. Take your time and compare the terms from different lenders to find one that offers you the best terms.
Consider Interest Rates
One reason why you wish to refinance is to borrow money at a low-interest rate, so ensure that the facility you will be getting is indeed at a low enough interest rate to make the refinancing attempt a meaningful one.
A reputable lender will not charge exorbitant fees to process your application. Neither will the provider include hidden fees in its charges. Some of the charges you may pay include:
- Upfront fees (Closing costs): You pay for this after signing the loan agreement
- Ongoing fees: These are penalties you pay if you pay off the debt early or late
One of the best financial decisions to make if you have an expensive debt is to take a new loan with better terms and repay your loan with it. By observing all the points that we’ve noted in this article, you will be in a better position to get a suitable loan with which to refinance any expensive debt you may be struggling with.