10 Tips To Obtain a Refinance Loan

Introduction

Changes in the financial environment or market often lead to people seeking to refinance loan. There are several factors encouraging or forcing people to refinance loan. One is the current interest rate, while other factors include better credit ratings, low interest rates due to falling market prices, increase in home equity, or the inability to meet monthly payments.

Step 1

Credit history is important. Before you could even get a lender to accept your application for a refinance loan, your credit history must be good. If you are defaulting on monthly payments, this is not a good sign to show as a potential borrower.

 

 

Step 2

Study interest rates offered. People opt for a refinance loan because the interest rates are favorable or lower than what is stipulated in their current loan.

 

 

 

 

 

Step 3

Check how applying for a refinance loan would affect you. True, people go for a refinance loan because of economic hardships or the desire to alter the risks in their loan by favoring less risky conditions such as a lower interest rate or longer debt payment scheduling. Evaluate how this would affect your finances in both the short and long term. By doing this, you'll see if you can afford a refinance loan or not.

 

 

Step 4

Don’t be lured by tempting ads. No matter how attractive those adverts seem, study the conditions and terms of lending institutions, banks, credit unions, and other financial institutions in detail. Look for hidden costs that may not be obvious and sift through the terms and conditions.

Step 5

Decide if you opt for a fixed or variable interest rate. In the last decade, interest rates have been falling. Lower interest rates mean that you pay a lower interest on the life of your loan. Generally, a fall in interest rates by 2% is advantageous enough to warrant a refinance loan. 

Step 6

Look at closing costs.  A refinance loan is the same thing as applying for an entirely new loan. It typically involves paying closing costs, the amount that is charged by the banks and lending institutions to process your papers and extend credit to you. For home mortgage refinancing, make sure that you are going to stay in the house to recover the closing costs. As an example, if your closing costs are $3000 and if you are saving $100 a month due to a refinance loan, it will take you at least 30 months (3000/100=30) to recover your closing costs. This only makes sense though if you are staying in the house for this time period. 

Step 7

Check institutions offering zero closing costs and know what these imply. Tempting as they sound, zero closing costs have their pitfalls as well. If you are planning to get a refinance loan from a lender that promotes zero closing costs, read the fine print of the offer. Zero means nothing. So, in fact you should not pay closing costs at all. However, the other side to this coin is, zero closing costs mean that these expenses will be added to the refinance loan that you are seeking. In effect, the closing costs are there but are masked in the total loan released to you. You either end up paying the entire amount over a longer period or increase your total monthly payments. Interest rates can also go up resulting to higher monthly payments.

Step 8

Request a meeting with the lender or bank. Phone calls are not sufficient. Arrange a meeting in person with a staff of the financial institution you are considering. This is one of the few ways where you can get an honest opinion of your expectations as a borrower. Don't be afraid to ask questions to a loan officer if something is not clear.

 

 

Step 9

Look at your home equity. Home equity is the difference between the amount you owe on your loan and the appraised value of a property. So, if the value of the home is high, you can cash out on the equity and use this amount. Note that when you use home equity, you don’t fully own your house. If you sell it, that means less money for you.

Step 10

Learn why refinancing might not be the answer. A refinance loan might not be the answer if you have been paying for amortization for a long time already because that means that you have to start all over again. In such a case, refinance loan is not ideal as the equity you have built on your loan payments is not available anymore.

Tips

Put everything on paper. All offers that you get from lenders should be put in writing before paying any fees especially those that are non-refundable.

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