Refinancing is a process of getting a credit facility with better terms and conditions and lower interest rates to replace an existing loan. Most commonly refinanced loans are mortgages, auto loans and student’s loans. Many consumers resort to refi as this process is also referred to because the terms and conditions of their existing loan are not favourable.
Another reason for taking out a refi may be that interest rates are generally lower. Sometimes also consumers may want to take out one big loan to pay off several smaller ones, thereby reducing interest to be paid.
In this article, we will concentrate on refinancing with security which has to do mainly with mortgages.
What Does It Mean to Refinance with Security
Security is another word for collateral; just as the name implies, it is an asset that stands as security for a loan. The asset must be of equal value with or higher than the value of the loan that the borrower is applying for. It mitigates the risk that the lender takes in giving out loans to their customers.
In the event that the borrower defaults on repayment, the asset is used to replace the loan. For example, if a borrower takes out a loan to buy a house, the house will be the collateral/security for the loan. In the event that the borrower defaults on payment, the house will be repossessed to pay off the debt.
In the same vein, refinancing with security means that the borrower has to present an asset of same or equal value to the loan amount that they seek.
Let us examine some steps to refinancing your mortgage with security
Steps to Refinancing with Security
Refinancing with security applies to loans such as mortgages and auto loans. People have also been known to take out loans against their home equity.
Evaluate and Know Your Financial Status
If you are considering taking out a refi credit facility, you need to evaluate your finances and know where you stand. This is because the lenders that you will be approaching will look at your income, credit score, debt to income ratio and in fact everything that pertains to your finances.
Bear in mind that these institutions are in business to make profit, so they will approve applicants that can repay comfortably faster than those who cannot. So check your credit score and ensure that it is at least 650; you should actually be aiming for 750 and above.
Ensure that your finances are in a ‘good’ place. If you have so many debts, you should consider paying some off before applying for a refinance loan.
Determine The Type of Refi That’s Best For You
There are different types of refinancing and they include the following:-
- Rate and term refi
- Cash in refinancing
- Cash out refinancing
- Debt Consolidation
You need to study all the types of refinancing that exists to know which one is best for you. Remember that you are putting up an asset of value for this loan so you should be sure of the option that works best in your circumstance. This will ensure that you do not lose your asset.
In determining the type of refi that you want, you should also consider the duration of the loan. This differs depending on the type of refi that you are going for. The lifespan of these credit facilities range from 15 to 30 years; the longer the duration, the lower the monthly payment but the more interest you pay at the end of the day. But with a shorter duration, you make higher monthly payments but lower interest at the end of the day.
Furthermore, consider the agency that you can approach for the credit facility. You can try to get loans that are backed by government like the FHA loans or go for the conventional lenders.
Be Sure of the Equity On Your Home
This point is for those that want a mortgage refinancing. Note that a lot of lenders do not approve refi that is more than 90% of the value of the property. Also bear in mind that if you take out a loan that is over 80% of the value of your home, you may end up with mortgage insurance debt.
To this end, it is vital that you know the value of your home and the equity you have on it. This will help you know how much you can apply for. You can either seek professional help in this regard or use some online tools to get an estimate of this.
Carry Out Thorough Comparison Shopping
After you have sorted out all the above, go ahead and shop for different lenders. You can start out by approaching your current lender and then also approach about 3 others. Bear in mind that each lender’s charge will be different.
When you get all your offers on the table, compare their interest rate, the requirements for qualification for refi, the origination fees and in fact every financial obligation. This will help you to determine which one is the best option for you.
Do not forget to use the same parameters for your comparison. For example, do not compare a 30 year fixed rate loan with a 15 year loan of the same rate or a 30 year fixed rate with a 30 year variable rate loan. Ensure that all the parameters of the loan offers that you are comparing are the same.
If you are looking for a mortgage refi, you can use a mortgage calculator so that you can get an accurate comparison.
Choose a Lender
After you have gone through the process of comparing different lenders based on the same parameters, go ahead to choose the best option for you.
Start the Application Process
The next step is to get all the necessary documents and information and submit an application to your preferred lender. Fortunately, these days, a number of banks and financial institutions accept online applications and also allow applicants to upload the required documents digitally. This makes the process a whole lot easier and seamless. We have just given you the basics for processing a refinance loan. There are more steps to wrapping up the whole process so you can go to forbrukslån.no/refinansiering-med-sikkerhet for more details.
Conclusion
Like we mentioned in this article, there are different loans that one can refinance and they include, auto, housing and student’s loans. Our main focus in this article was on mortgages; however, the information herein is useful for anyone seeking a refi credit facility.
In closing, if you aren’t financially savvy, it is in your best interest to work with a financial advisor or a legitimate loan agent. A professional will be make the process easier for you but ensure to read and understand the fine prints regardless. Keep your eyes open and do not act in haste.
