Many consumers seek to refinance certain debt obligations to obtain more favorable borrowing terms. Certain conditions like a negative shift in the economy are the main drivers. The common goals for refinancing are to lower the fixed interest rate and reduce payments over the entire period of the loan. It also helps to change the loan duration or convert from a fixed-rate mortgage to a flexible mortgage known as the adjustable-rate mortgage or vice versa.
Borrowers also have options to refinance because their credit profile improves. They will have to change long-term financial plans or pay off existing debts by using loan consolidation into a one-priced loan.
What Does It Mean to Refinance and Convert a Loan?
Refinancing a loan refers to the process of getting new loans and paying off the outstanding loans. A borrower will then replace their existing debt obligation and use another one with more favorable terms. All the terms of the old loan are replaced by the new agreement the borrower decides to use.
You can get this done by any consumer lenders who also offer traditional loans. You may get higher interest rates when refinancing products like mortgages and car loans rather than purchasing loans.
The Process of Mortgage Refinancing
The refinancing mortgages will help you in the following ways:
- Reduce the monthly mortgage payments
- Pay off your credit card debt
- Improve home finance
- Get lower interest rates
- Eliminate private mortgage insurance
- Reduce the term of the mortgage
There are several types of refinancing options available, such as:
- Rate-and-term refinancing: It is the most common type of refinancing that most borrowers opt for. It occurs when you get a loan to repay the original loan and replace it with a new loan agreement with favorable conditions such as low-interest rates
- Cash-out refinancing: This is a more favorable type of refinancing when the underlying asset for collateralizing a loan increases in value. The process involves withdrawing the value of equity paced for the asset and being replaced with a higher loan amount, often with higher interest rates. By increasing asset value on paper, you gain access to a bigger loan amount rather than selling it. Therefore, this option allows you to access cash immediately while maintaining ownership of the asset
- Cash-in refinancing: It allows you to pay down a payment if the loan has a lower loan-to-value ratio or makes fewer loan payments
- Consolidation refinancing: There are cases when loan consolidation can be the best option for a borrower looking to refinance. It is used when the inventory obtains a single loan lower than the current average interest rate on the credit products. The borrowers will then apply for a new loan then pay off any existing debt, leaving the outstanding principal with a lower interest rate
A refinance typically takes around 30-49 days to complete. It can be short or long, depending on the size of the property and the complexity of the finances.
Should I Refinance?
There are several considerations you need to make before you refinance. First, carry out a break-even calculation to determine the period from savings to refinancing to exceed all the associated costs. Refinancing can take a longer time to recover the costs, making it unworthy of your efforts.
Secondly, consider how long you plan to stay in your home and check on the period when home values decline. A low home valuation means you will lack sufficient equity to make a down payment on any new mortgage.
At First Savings Mortgage, we help you get the best refinancing options that match your needs. Reach out to one of our expert loan officers to learn more about specific opportunities that best suit your financial needs.