When it comes to refinancing timing is almost everything. Here are things to consider when deciding when to refinance a loan.
Understanding Refinance
Refinancing means you are borrowing money on top of your existing mortgage. You are simply replacing your existing mortgage with a new one. In most cases, the new lender pays off your existing mortgage with better rates and more affordable terms and becomes the new holder of the mortgage on your property.
Here’s an example. Amanda has a mortgage of $200,000. She has already paid $50,000. But, she is having a hard time repaying her loan because of the high monthly payment. So, she went to Lender X, applied for refinancing and received the same amount of mortgage which is $200,000.
The situation above seems to be a good deal for Amanda. But, if you want to refinance a loan, make sure that the timing is right—meaning, these circumstances below are present:
You need to borrow money and there is no cheaper alternative available
Refinance is a practical way to borrow money. But, remember that you are putting your property at stake. If you want to borrow money for a trivial reason, think of how it is going to affect your finances. For example, would you refinance your home to get a new car? Or, do you plan to pay for your child’s education using your property?
You want to take advantage of the best interest rates
If yours is a fixed-rate mortgage, you may want to convert an adjustable-rate mortgage, especially if the housing market is favourable to you. With adjustable rates, your interests can go down by a notch and it means lesser money to pay on your monthly mortgage dues.
You want to change the term of the loan
Do you intend to pay off your loans longer? Longer terms may mean lower monthly dues, but it can also mean higher interest rates or higher overall fees. Make sure that you discuss the exact figures to expect before signing the refinancing agreement.
Debt consolidation
If you have many debts and you cannot keep up with the payments, you can refinance a loan for consolidation purposes.
It may take some time to get over bad credit. It takes financial discipline and determination to stick with a working budget before you can finally manage your debts. Increasing your credit score is also an entirely different story. While you pay your debts, you may have to work on some credit file mistakes and some debt repayment strategies to ensure that your score will build up over time.
But, if you want to come to terms with your creditors as quickly as possible, debt consolidation is a good debt management strategy you should not ignore. It helps you settle your unpaid debts, stop collectors from knocking on your door and probably prevent them from filing a collection case against you.
Can Debt Consolidation Help Repay Debts
Debt consolidation can help you when simply cutting back on your expenses so you can repay your debts is not enough. If you barely keep up your daily needs because of piled up debts with high-interest cost and charges and you think you don’t have the time to track and correct inconsistent spending habits, debt consolidation can do the trick.
While refinancing a loan to consolidate debt is not a magic formula to improve your finances, it can certainly make it better. It rolls all your debts into one, makes it easier to pay and allows you to get the interest rates fees and charges that work on your budget.
You have the right financial goals
When you refinance a loan, you usually have to extend the loan period. While the mortgage interest rates of the new loan are lower; it means that you are also putting your home’s value at some else’s hand. So, if you intend to refinance your home, make sure that you set aside an amount to build your home equity. That means, paying off your loan on time, and making simple home improvement projects that could increase the fair market value of your home. You would be surprised at how a good tabletop, a functioning heater and good lighting could increase your home’s value. Whether you intend to sell you home in the future or not, it is still advisable the value of your home is increasing and not deteriorating.
You are prepared to submit documentary requirements to refinance a loan
The loan application process can be a bit tricky. You have to answer some questions in the refinancing loan document. It is also advisable to keep the following documents handy:
- Asset bank statements
- Credit verification—like letter of explanation for missed or delayed payments, bankruptcy or discharge papers (if applicable)
- Homeowner’s insurance information
- Identification cards
- Income verification
- Income tax documents
- Income verification
Do you need more information on how to refinance a loan? Contact us today!
