In life, there are things we want but don’t actually need, and there are things we absolutely need for life to be a little bit easier and enjoyable. For some people, what they need to live a happier life could be owning a home of their own, for others, it could be going to college and obtaining a degree, while people may also feel like they need to own a nice car. Building fond memories with family and friends could also be a need.
Irrespective of the need, it is true that we may not always get what we need and want if it was left to our financial capabilities. However, when you’re unable to get those things you want or need with your own money, you always have the option of taking out a loan.
Many people have gotten out of tough financial situations all thanks to the availability of loans. Depending on several factors, one could get loans of up to millions of dollars to sort out any kind of difficulty. They can be used to settle medical bills, pay for college, buy a home, finance a nice vacation, or even clear credit card debt or gjeld, as it is called in Norwegian; the list is endless.
Unfortunately, while loans can save people from a lot of problems, repaying those loans can turn out to be a problem itself. You see, when you take out a loan, there’s a certain interest that you must pay because lenders are businesspeople that want to make profit. Also, you’re given a specific time within which you’re required to have paid back the loan in full before its expiration.
For instance, a borrower who wants to buy a house can take out a 30-year loan of $200,000 with an interest rate of 30%. Usually, borrowers agree to the terms of the loan since with their present financial capabilities, making the agreed monthly payments wouldn’t be a problem.
But down the road, things like new financial responsibilities and obligations, or a job loss, may affect their ability to meet up with their monthly payments, sometimes leading to the defaulting. This often leads to discomfort and unease that can quickly override the joy and happiness that came from buying that home, car, or getting that degree.
However, like the loan was able to help you out in that situation, a refinance may be able to get you out of the current situation and get your finances back on track.
What is a Refinance?
A refinance refers to the process of changing or replacing the terms of an existing loan with a new one. Basically, a borrower applies for a new loan with better rates and terms which is used to settle the old loan. Many borrowers have successfully paid off their debt by refinancing, and in some cases, they’ve been able to save some money in the process.
Many borrowers think that refinancing is a complex process, but it really only is as complicated as you make it. The processes are straightforward, and the whole thing can be done with before you know it, especially if you’re doing it with a lender that prefers getting things done in a timely manner.
As have been mentioned, people refinance to get a more favorable term and rate that will enable them make their monthly payments without it being much of a burden to them. However, getting new terms or rates are not the only reason people seek to refinance. A person may refinance to switch from one type of loan to another. For example, a borrower can refinance from an FHA mortgage to USDA, VA, or conventional mortgage.
Another reason people refinance is to switch from a fixed-rate mortgage to an adjustable-rate mortgage (ARM), or vice versa. There are advantages and disadvantages of switching from one type of interest rate to the other. The advantage of fixed-rate mortgage is that an increase in market rates won’t affect your loan since the rate was fixed at the time of taking out the loan. However, the disadvantage is that you also do not benefit when market rates drop significantly, so, it’s more like a two-edged sword.
For adjustable-rate mortgages, the rate is fixed for certain period, after which it becomes adjustable and fluctuate based on a reference interest rate. While the fluctuation may be to the borrower’s favor, it could also be unfavorable and go higher than the initially set rate.
You can learn more about this process here: https://www.valuepenguin.com/loans/refinancing-a-loan-what-it-means.
Steps in Refinancing
As mentioned earlier, the steps involved in refinancing are easy and straightforward. They include:
- Locking your interest rates
To let your lender know about your intention to refinance an existing loan, you have to first of all apply. During the application, you’d be asked for the information you provided when taking out the existing loan. Following standard procedures, your assets, credit score, and income will be re-evaluated to know which options are available to you.
A borrower who is married may be asked to provide documents about their spouse’s finances as well. Self-employed consumers may also be required to provide additional documents on their income to proof that they are financially capable of repaying the new loan. While some people simply go back to their lender when they decide to refinance, it is not mandatory, and consumers can choose a new lender for the process.
Once your application is submitted, the next step is underwriting which is basically the verification of all the information and financial documents you submitted for your application. In the case of a mortgage, an appraisal will be done to determine the value of the property.
In the refinancing of a mortgage, appraisals are crucial because they help the lender determine the type and size of loan that will be given out to the borrower. Aside from determining the value of the property, other information on the property like the borrower’s equity in the home is also verified. This is especially important in the case of a cash-out refinance.
Because appraisals can affect the outcome of your application, it is important that you make your home as presentable as possible to the appraiser that will be sent by the lender. Little things like cleaning up the home and making minor fixes where necessary can add to the general appeal of the home in the eyes of the appraiser. Finally, listing any upgrade you’ve done on the property since owning it could help increase the value of the property.
Once the appraisal is complete and your home’s value is estimated to be below the debt you are looking to refinance, you may have to cancel the application. However, if the value of the property is equal or greater than the current debt, the underwriting will be concluded, and your application can move on to the next stage.
Locking in Your Interest Rates
Once all your information has been verified and the lender is now ready to draw up a contract, you have the option to lock your interest rate or leave it floating. Depending on several factors, your rate can be locked for as long as 60 days, but, at the expiration of the rate lock period, you can pay a certain amount to renew the lock.
Locking your interest rate is great way to avoid market rate fluctuations that could grow quite high based on several economic conditions. However, these economic conditions could also lower the market rate as have been explained earlier. Overall if you’re happy with the rates at the time of signing the documents, it may be a wise choice to have it locked.
Once everything has been sorted out, you’ll receive a closing disclosure document from the lender that contains all the details of the loan. All the parties concerned with this loan will be present at the time of signing this document.
Once the contract is signed you have a 3-day grace period to get out of the contract if for any reason you wish to discontinue the process. At the expiration of this grace period, you’re “locked in” and the funds will be made available to you on a date agreed upon by both you and the lender.
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