Refinansiering – Exploring the Basics and Benefits of Refinancing

Refinansiering – Exploring the Basics and Benefits of Refinancing

Refinancing is a financial strategy that is employed by borrowers to replace a current loan with a new one. This is usually in order to avail themselves of access to equity, better terms or lower interest rates.

Refinancing is one strategy that comes in handy for saving people from financial tight corners and quagmires. We are all aware of the fact that a person can be so overwhelmed with debt to the extent that is detrimental to their mental and physical health. That is therefore why it is important to explore every means that can help them get out of debt or lessen the debt burden.

To this end, this article will explore the basics of refinancing, its benefits and drawbacks and considerations for engaging.

Understanding Refinancing

Before you can really take advantage of this strategy and get the best out of it, you must have at least a basic understanding of the concept. Armed with the requisite knowledge, you can go ahead to access the best refinancing or Besterefinansiering in Norwegian. So pay attention to these key features of a refinance or refi loan:-

  1. A refinance happens when the terms on the agreement for an existing loan is revised. These terms include the interest rate, repayment duration and schedule and monthly payment.
  2. Borrowers always seek to refinance when there is a fall in interest rates.
  3. A refinancing entails the re-evaluation of the borrower’s credit status and repayment history.
  4. The types of consumer loans often considered for refinance are mortgage, student and car loans.

Reasons why People Seek Refinancing

Consumers most commonly seek to refinance their debt so as to access more favorable loan terms and it is usually in response to changes in the economic landscape. The common goals for refi include:-

  1. To lower the interest rate and thereby reduce monthly payment over the duration of the loan.
  2. To change the duration or lifespan of the credit facility
  3. To change from an adjustable rate mortgage to a fixed rate or the other way round.

Other reasons why borrowers may seek refi are as follows:-

  1. Their credit history has improved
  2. There are changes to their long term plans(financially)
  3. Their financial status has changed due to retirement, death, divorce or loss of income.
  4. To pay off outstanding high- interest loans with one low interest rate credit facility through debt consolidation.

In summary, the interest rate environment is the highest motivator for refi. Due to the fact that interest rates rise and fall in cycles, a good number of consumers decide to seek refinancing whenever rates drop. The reasons for the cyclical rise and fall of interest rates include:-

  1. The economic cycle
  2. National monetary policy
  3. Market competition

Benefits of Refinancing

The reason for refinancing can also be said to be the benefits of the process. So we will just briefly highlight them once again:-

  1. Lower Interest Rates – This process can provide the consumer with lower interest rates which results in lower monthly payment so that at the end of the loan term, the borrower would have saved some money.
  2. Debt Consolidation – Combining several small loans into a single one can help borrowers simplify their debt management process and also lower the overall interest costs.
  3. Cash-Out Refi – This strategy allows a homeowner to leverage their home equity to access funds for debt consolidation, home improvement and other financial obligations. Visit this site: https://edition.cnn.com/ for more information about cash-out refinancing.
  4. Shortened Loan Term – Refinancing offers consumers the opportunity to shorten their loan term. This in turn result in the borrower paying off their debt(s) on time and thereby saving money on the total amount they pay on interest.
  5. Improved Financial Flexibility – A borrower can adjust their loan term to align better with the current state of their finances and the goals they want to pursue.

Drawbacks of Refinancing

Just as with everything in life, refinancing thought quite beneficial has some drawbacks and they include the following:-

  1. Your credit score will take a hit at the time you take out the refi loan but thankfully, that can be rectified by contentiously paying off your debt.
  2. You may end up in more debt if you did not do your due diligence before taking out the new credit facility.
  3. The closing costs may make the new loan not worth your while (this applies mainly to mortgage refinance).

Factors to Consider Before Refinancing

Having seen the pros and cons of this financial strategy, here are some factors to consider before you proceed to sign a new loan agreement.

  1. Current Interest Rates – This may seem like a moot point but it is highly essential and sadly some people don’t pay the necessary attention required to it. Compare the interest rates if the two loans (current and intending) to determine whether you will have significant savings.
  2. Closing Costs – Find out what the closing costs will amount to and compare that to expected savings you will make in the long term. These upfront costs include appraisal fees, application fees, pre-payment penalties etc.
  3. Repayment Duration – Consider your financial circumstances, budget and objectives to determine whether you will shorten or extend the loan term or just maintain the current repayment duration.
  4. Equity Position– Consider your home equity to be sure that it is up to the minimum amount required for qualification. Additionally, the level of equity you have also affects the terms and rates that you can qualify for.
  5. Credit Score– Make sure you understand how your credit history will affect your chance of qualifying for the refi loan and also the interest rate you will be offered. If you find out that your credit score does not measure up, make efforts to improve the score to increase your chances of qualification and getting better interest rates and loan terms.
  6. Financial Goals – Evaluate your long term or short term financial goals so that you can align the refinancing to align those goals and afford you tangible benefits.

Understanding Refinancing with Collateral

This is a situation where you provide collateral for the refi loan. In countries like Norway, borrowers are allowed to apply for refi with a guarantor or co-signor.  They can also present their home or their parent’s or spouse’s home as collateral. The essence of applying with a guarantor is that they will contribute part of the equity while the co-signor will share joint liability for the loan with the primary borrower.

Refinancing with collateral is a great strategy for getting the lowest interest rates possible. As we mentioned the collateral can be your home or security from a guarantor or co-signor. This is considered the best option for getting funds for home improvement without incurring expensive debts.  Click here for more details on refinancing with collateral.

Key Features of Refinancing with Collateral

The key features of refi loans with collateral include the following:-

  1. The applicant must own a home with an existing mortgage.
  2. The amount applied for and approved cannot be more than the value of the home. Additionally, the value of the home must have increased from what it was when you took out the mortgage.
  3. Just as like in an initial mortgage, you can get up to a 30- year loan term.
  4. Your equity in the home must be up to 15% before you can use it for refi.
  5. Your total debt must be less than an equivalent of your income x 5.

The Process of Refinancing

The following are steps involved in the process of refinancing:-

  1. Prequalification–You start by getting quotes for loan from different lenders and comparing the fees, interest rates and terms. Then you seek prequalification to determine the loans that you are eligible for.
  2. Application – After you prequalify, you send in application to the lender(s) of your choice with the requisite financial documents and info about your current loan.
  3. Appraisal – The lender may demand a home appraisal in order to assess the value of the property and determine the level of equity that is available for the refi.
  4. Underwriting – This is the process through which the lender evaluates the borrower’s application, financial documents and credit history to determine whether they qualify for the loan or not.
  5. Closing – If the application is approved, the lender will finalize the loan terms and the applicant will sign the loan documents and pay all the fees that are involved. Once all that is done, the new loan agreement replaces the existing one; after that you start to make payments based on the new loan agreement.

Conclusion

Refinancing affords consumers the opportunity to reduce loan costs, optimize their financial status and achieve their goals. However, before you think of leveraging this option, you need to consider all the pros and cons and ensure that it is the best course of action for you to take. We have shared some basic information here that should add to the body of knowledge that will help you make an informed decision.