What You Need To Know About Loan Refinance

Introduction

In simple terms, a loan refinance is the same as debt restructuring. When you borrow money to buy something such as a house, your loan conditions are based on a fixed or a variable interest rate for a defined period. For instance, you buy a house that is worth $250,000. You might have savings of $50,000 that you can use to pay a part of the cost. However,  you need to come up with $200,000 to purchase the house. In this case, you go to the banks or any financial institution and borrow the difference. At the time your loan is granted, you pay the prevailing interest rate. Let’s say you decide to pay the amount over a span of 30 years. You pay a monthly fee to the lender or your creditor in that time span.

History

Undertaking a loan refinance in essence boils down to paying off your existing mortgage and getting another loan with different terms and conditions. There are costs involved such as expenses that go to pay your lawyers, financial advisers, loan processing fees, and appraisal reports. An upfront fee is required to refinance loan usually at 1%.

Features

Despite these costs, there are market events that are conducive for a loan refinance. If you are unable to meet your monthly payments, you might consider a loan refinance. Your credit history might improve and favors you getting a loan at a better rate.

In such a case, you are borrowing money with different conditions with the aim of freeing up more cash and paying your entire debt faster. Low interest rates are other factors to consider. In the case that interest rates are low, making a loan refinance can benefit you, allowing you to consolidate your borrowings in one loan, under different conditions.

You can also modify your interest rates by opting for a fixed rate or a variable rate. Under fixed rate terms, you will pay the same interest rate over the entire loan period. So, if the interest rate is 6% when you borrowed money and that loan is going to be paid in 30 years, it will be based on this amount for the entire life of the loan. This means that market interest rate changes will not affect the amount of interest that you pay on your loan.

Variable interest rates however, have their risks and advantages. The prevailing rates are applied on your loan. You can benefit when they are low, but not when they are high. Higher rates mean higher interests on your loan.

If you are thinking of refinance loan because of default payments or because of lower interest rates, there are also certain things that you have to consider. Your credit history is one factor. Lenders are more than happy to give you a loan refinance if you have a good credit history, meaning that you don't have loan defaults and are able to meet your credit payments on time. Generally, a FICO score of 720 is the standard norm for a good credit rating.

Another factor to consider is the trade off of a loan refinance. When you do this, it is usually with the motive of consolidating debt into one loan, get better terms such as lower interest rates or modify the risks in the loan. A refinance loan on an existing debt will also lower monthly payments. However, the disadvantage is that repayment will occur for a longer period, although with lower monthly payments. While it frees up cash in your home equity, you also have a longer time period to finish paying your debt.

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