Have you ever heard of refinancing? Has it sounded like something that interests you, but you have not been sure how to get started – or even what it is in an in-depth sort of way? Well, I have some good news – this article is going to be offering you a deep dive into both of those questions.
I know that the world of finances can get quite complicated, honestly. Many a time I have found myself exceedingly frustrated about not understanding certain contracts or even articles that cover these topics. Hence why I will do my utmost best to make this as digestible as possible.
For some other resources, before we get started, you may want to give this one a look: https://www.investopedia.com/terms/ . It is not necessarily the most in-depth explanation, but I find that it can provide some much-needed perspective before we get into it today. Generally speaking, though, I will try to cover everything that is pertinent!
Refinancing: What is it?
I would be remiss not to cover this first, seeing as everything else discussed here will be revolving around this one simple question. With that being said, what really is refinancing? Is it some complicated, ill-conceived process designed to make our lives harder by bombarding us with stacks upon stacks of paperwork?
You will likely be relieved to know that this is far from the case. In fact, I consider it to be one of the few aspects of taking out a loan that is relatively intuitive. The trick will be to know when to apply for them, which I will be getting into further on in this article.
Putting it in simple terms, refinancing is when you renegotiate the terms of a pre-existing credit agreement (loan). This could be with your current lender, or with a different one that offers you a better deal. Naturally, that will be up to your own discretion to some extent, though it will also depend on your application, and which gets approved.
Simple, right? For the most part, yes. Applying is where it can get a bit complex, so I will be explaining that in the next section. However, in terms of a definition, this is pretty much all that you need to know!
Applying: How it Works
The first thing that you will want to do is consider whether you want to change to a different lender and refinance that way, or if you would rather just renegotiate the terms of your contract with your current lender. This will depend on a few factors, naturally. Do you like your current lender, for one thing?
While that may appear somewhat superficial at first glance, trust me when I say that it is certainly something that you will want to consider. You see, if you do not find that the customer service is up to your standards, or that your interactions are altogether unpleasant with them, it may be time to make a change. Refinancing allows you an opportunity to do so, after all.
However, if you enjoy working with your current financial institution and want to continue that relationship, there is certainly nothing wrong with that! Either way, you are going to be looking to søke om with your lender of choice. Search on their website for an application link or give them a phone call to determine what your options are. If they have a branch near to you, walking in or scheduling an appointment may be something else to try.
Once you have made that critical decision, it will be time to determine what the goal of your refinancing plan will be. Are you seeking to lower your current interest rate, perhaps? Maybe you want to reduce your current monthly payments. You could also be aiming for both of those things.
When you have those aspects situated, you can start the application process. It’ll likely function quite similarly to your initial contract and application for your first loan; so you will likely have some idea of what to expect. Still, having important documents such as your tax records, current pay stubs, and identifying papers will probably be relevant; so it doesn’t hurt to have them around and at the ready.
From there, you can simply fill out the new paperwork (be that virtually or at an in-person session) and wait on the results. With any luck, you will be approved for the refinancing plan and get to enjoy the benefits of your new contract! Certain factors can improve your chances, such as having a good history with the lender you want to work with and a high credit score.
What can You Refinance?
The next question at hand is what sorts of loans can we actually do this process for? It will probably please you to know that most of them can undergo refinancing; – the main question will usually be whether your specific lender allows it for the type that you have. Most commonly, mortgages are what folks opt to refinance.
There are a few reasons for this, but the main one is changing interest rates. Over the course of several decades, it is rather inevitable that rates will change. The key will be to wait on the most optimal moment – that being when interest rates are considerably lower than they were when you made the original contract. Admittedly, knowing this moment can be quite hard, so you may want to consult with an expert or an advisor if you are not certain about it.
However, mortgages are far from the only loans eligible for refinancing. You can apply for it for pretty much any type of loan, including personal or consumer ones. This is perhaps what makes going through this so appealing; even if the paperwork can be a tad on the frustrating side sometimes. If you have annoying monthly payments for a personal loan that you would like to reduce; that may be a situation in which you want to apply to refinance.
As I’ve mentioned before, that’s really the main reason that folks decide to do this in the first place. When we have expensive monthly payments and high interest rates to content with; things can feel hopeless or like you’re drowning in all the debt. If you find that you are in that sort of situation, you might find refinancing can help you out.
Weighing the Positives and Negatives
In this final section for today, I want to briefly cover some of the positives that you might experience from refinancing along with some of the negatives. It is a good idea to be familiar with both sides of this coin so that you can decide for yourself whether or not it will be worth it. Sometimes, it will simply not work out, and that is okay.
The first positive is that, of course, you can negotiate your interest rate or monthly payments to be much lower than they were before (depending on your credit score). However, with that might come a total reset of the length of your credit agreement. That could mean that you are on the hook for another ten to fifteen years, even; so read over the new contract carefully to determine if the length is being reset.
Often, that does happen when you reduce payments or interest rates, since the lender still wants to make a profit. While it can be annoying, it is at least understandable when we examine it from that standpoint.
There is also the fact that if you are doing it on a mortgage; you could actually end up lowering the equity that you own in your home. While that might sound a bit ludicrous, it is a risk, so keep an eye on that. In a similar vein; you may end up not being able to have a fixed-rate mortgage unless you decide to refinance again; which could come with some hefty fees. These are just a few considerations, though, and personally I do not think they outweigh the positives.
As you can see, refinancing is not nearly as complicated or scary as it may seem on the surface. Sure, there are a ton of articles out there that sensationalize it or make it seem inaccessible to folks; but the truth could not be further from that. Most people with loans can talk to their lender about potentially coming to a refinancing agreement.
Conclusion:
So, if you are looking to shorten the term of your loan, mitigate those hefty monthly payments; alter your interest rate, or more, this might be something that you want to research. Hopefully this guide has offered you some valuable insights into the overall process; but it never hurts to do some of your own investigating as well.
After all, this might work a bit differently depending on where you live and who your lender is. Check out the local legislation and procedures if you are not certain about that. Once you do that, you should be able to apply!