Finance

Should You Refinance A Loan?

Should You Refinance A Loan?

Sometimes, the money you earn on your job is not enough to cover all of your expenses. There are scenarios in which you need a lot more. That includes buying a new home, getting a new car, or even paying for expensive medical bills. 

Some of these purchases are planned, while others are not. When you borrow money from a lender, you always need to pay it back, or else the consequences are going to be severe, especially for your credit score. Loans are always supposed to be paid off in pre-determined amounts over a specified period of time. 

When you pay a rate, most of that money goes to pay for the initial principle, and some of it will cover the interest. The faster you repay everything, the less interest you’re going to pay in the long term. However, that number is never going to be zero. Click here to read more. 

Still, decreasing the percentage as much as possible is always going to turn out in your favor. Over the life of a loan, you’re going to see some changes. If you’ve already signed an agreement for 15 or 30 years, then you might be surprised by the total amount that you have to give back. 

That’s one of the reasons why so many people turn to refinancing. With this option, you can replace your current loan with a new one that has better features, such as a lower rate or a more extended timeframe. 

This is going to make your life much easier. Another thing that’s useful is combining a couple of loans into a single payment. This way, instead of paying for five different things, you just set aside the same pile of money all at once. This makes life much easier.  

How does that work? 

Most advisors will tell you that refinancing is only an option that needs to be considered when you can shorten your term or decrease your rates. This type of guidance isn’t always accurate. In some cases, it might be better for your financial status to create a completely new 30-year loan and start anew. 

This will make your monthly payments much lower, and you’ll have more room to breathe in times of crisis or when something unexpected happens. Another great benefit of refinancing is gaining the ability to eliminate insurance fees for an FHA loan and even gain access to the equity of your home. 

The idea behind this process is quite simple. If you have a house that you bought through the bank, you go to the same institution or another lender, and you obtain a completely new loan. This new cash influx will pay off your previous debt, and you’re going through the same process again. 

Now, you’re not going to deal with the stress of buying a new home or relocating, and there won’t be any hurry to pay it off for a specific date. Also, you have a couple of days to completely nullify the transaction if you decide to change your mind. 

Furthermore, you should be aware that this process is going to be a bit more complicated than your previous borrow. The documentation needs about a month to be completed and approved. Sometimes, lenders are put into a tight spot, and it can take even longer.  

When is the right time to do it? 

Decreasing your monthly mortgage payments comes with a lot of benefits. First of all, you have more money to invest, which can bring in dividends in the future. If you plan everything nicely, you could cover your monthly rates with the dividends that are coming from your investments. 

This scenario is quite rare, but that doesn’t mean you shouldn’t try to achieve it. Additionally, refinancing reduces the interest long-term. Since you have the option to choose the term, you can make it longer or shorter, based on the end result you want to achieve. In plenty of cases, it helps individuals to get rid of mortgage insurance. 

The thing that you need to consider before you sign the papers is the credit report fee, insurance fees, appraisal fees, and the origination charge. This will cost you anywhere between six to two percent of the entire amount that’s being borrowed at that moment.  

Can you take advantage of a lower rate? 

In order to succeed in this endeavor, you need to keep track of the market interest rates each month. They’re always changing, and they’re not making it to the news of mass media, which always goes for emotion-provoking headlines. 

However, that doesn’t mean that it’s not your responsibility to try and make your life easier in the long run. Grabbing a lower rente is the best thing that you can possibly do. That will cut your payments, which is an amazing thing to look forward to. 

Another thing that you can do is to improve your credit score. This number has a lot of influence on your life, even if you don’t pay attention to it. The banks and lending institutions value it, which means that you need to try and increase it as much as possible. 

At the moment, you need a value that’s higher than 760 points to obtain the best conditions and prices. During the pandemic, over three-quarters of the people that refinanced their homes had a score that was higher than this number. 

The final option you can do is to use cash as means to repay the last 20 percent of equity left. Even though the Federal Reserve is printing cash, banks need it to have the ability to create new loans.  

Should you go for a shorter-term? 

Let’s say that you’ve made a plan to repay a house for 20 years. If you decide to prolong that period to 30 years, the monthly payment is going to decrease. However, if you want to finish repaying in 15 years, then you’re going to set aside even more money than you’re paying at the moment. 

In the ideal scenario, you should go for something like 10 to 15 years, which minimizes interest rates and remove a lot of years from the entire process. This could be very advantageous if you get a promotion or if you get a side business rolling. 

The same thing is true about passive income. When you know that a payment of a hundred bucks is going to roll into your account each month, it makes sense to direct it into a new rate instead of buying a new pair of shoes or getting a couple of shirts. At the moment, only 20 percent of people are shortening their terms. If you want to be a part of that group, you’re going to have to work on skills that are highly profitable on the market.  

What are the most affordable rates, and how can you find them? 

The best places to start are internet comparison sites. With a couple of clicks, you could compare credit unions and banks. This will give you a general idea of what you should be looking for. Sometimes, you don’t have the time to be doing this all on your own. That’s one of the reasons why you might want to work with a broker who will do all of the research for you. 

Additionally, to get formal information, you need to send out five applications or fewer. The estimates that you’re going to receive back go to the government, and they will then project your future rates and disclose that information with you. The same thing is true about closing expenses, as well as the monthly payments.  

Things to consider 

Before deciding on this procedure, you need to think about whether you really want to stay in the same home where you live at the moment. If you want to sell the property in a couple of years, there’s no need to go through so much paperwork. Also, you need to consider how old you’re going to be when the term ends. Being in debt in your sixties doesn’t sound like something that a lot of people have planned for retirement.  

About the author

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Tom Bernes

Tom Bernes is the Editorial Director at The Next Hint Inc.

Prior to joining The Next Hint Inc, Tom had a hand in a number of online and print publications, including InternetNews.com as chief copy editor and Government Technology Magazine as managing editor. He also did a stint in Sydney as group editor of RBI Australia's manufacturing group, which is when he also developed an affinity (a love, really) for cricket.

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