With the help of banking programs, you can reduce the rates on an existing loan, increase the repayment period, or simplify the general calculation scheme. Mortgage refinancing is refinancing in another bank on more favorable terms. That is, the borrower goes to the bank, takes a mortgage there, with which he closes the old mortgage, and continues to pay the new bank. Many are interested in how to go about refinancing your home. To find out the answer to this question, it is essential to know the intricacies of this process and home loan refinance: back to the basics that will help you refinance correctly.
What is Loan Refinancing?
The first thing in the guide to refinancing mortgage is the definition of refinancing. This process means obtaining a new loan from a bank on more favorable terms for full or partial repayment of the previous one. Refinancing can occur both in the former creditor bank and in some other one. Do not confuse refinancing and restructuring:
- During the restructuring, you deal with the bank where you took the first loan. You can change the terms of the loan or transfer to another product;
- A mortgage in one bank is fully repaid with money received in another when refinancing.
As a rule, the borrower issues a loan or credit card online with an instant decision in the new bank, which, in turn, repays the debt in the old one, transferring the amount of the debt there. The new loan may exceed the debt in the previous creditor bank. The remaining part of the loan is used at the borrower's discretion.
Moreover, in this case, while the pledge is still registered in the old bank, the new bank can set an increased interest on the loan since the loan is unsecured at this time. As soon as there is a complete re-registration of the collateral, the borrower begins to pay the loan at lower mortgage current rates. It is done, for example, when refinancing a mortgage. Suppose refinancing is carried out in the same bank where the mortgage was issued. In that case, the collateral is not reissued, and, accordingly, the borrower can reduce costs and save time.
Mortgage Selection
When choosing a new mortgage, it is necessary to compare the costs of lowering the rate. To do this, the borrower needs to find out all the costs of refinancing in a new bank and calculate the difference in interest rates on loans with the help of refinance calculators. It is not recommended to start refinancing if this difference is less than 2%.
When refinancing a loan, the borrower's solvency is assessed by the bank, as in conventional lending. It checks a person's credit history. Suppose he constantly had delays during the period of servicing a loan in a previous bank. In that case, the bank can refuse to refinance him. The borrower may also be banned if his financial situation has deteriorated since the receipt of the first loan.
Why Go to Another Bank
The first reason is lower refinance rates. There are other reasons to change banks:
- reduce the monthly payment by increasing the term of the loan;
- combine several loans into one: it is easier to control the burden on the budget;
- change the collateral object, for instance, if you want to sell it.
With the question of which loans can be refinanced and which cannot, you need to contact the selected bank. There are no restrictions and criteria concerning debtors in the legislation.
What Are The Advantages?
Benefits of refinancing a loan:
- You can get a new loan on more favorable terms: pay off the old one and pay the bank completely different interest;
- You can reduce not only interest but also the monthly amount of payments. Sometimes, this is even more important than reducing the interest rate;
- You can combine several loans and make one out of them: you don't have to follow the payment schedule and count overpayments. The scheme will be more transparent;
- Among other things, you can extend the loan period if necessary.
- Among the disadvantages of mortgage refinance:
- It is not available to those who have sinned with delays in payments;
- It is considered unprofitable if the debtor has repaid more than half of the old loan;
- Moreover, there may be red tape with papers, but it depends on the bank you applied for refinancing.
If you want to find out more, check this video by Jaspreet Singh https://youtu.be/jHqBtKeCjtw. It tells you why going for refinancing might not be the best idea.
Refinancing Process
To understand how do I refinance, it is essential to follow these steps:
- Choice of a more favorable credit program.
- Contacting the bank and obtaining a loan agreement.
- Calculation: The overpayment amount on the new loan should be less than on the old one.
- Preparation of documents, signing a mortgage agreement and familiarizing the payment schedule.
- The bank repays the client's loan ahead of schedule in another credit institution and issues a new one.
Next, specify how to refi and how much you have left to pay for the current loan at the old interest rate. It is essential to calculate what the payout will be for the same time at a lower rate in another bank. In the end, compare how much you can save. If the difference is significant, consider switching to another bank to refinance the loan.
When Refinancing a Loan is Not Justified
Refinancing is not a good deal in numerous situations. For example, if the loan amount is small, you paid off most of it. In this case, the reduced rate does not guarantee savings. When paying off an old loan and opening a new one, you have to spend additional funds. For instance, when refinancing a mortgage in a new bank, you need to pay for the issuance of certificates, notary and appraiser services, insurance premiums, etc. Given the additional costs, repaying a new loan can be more expensive even with a reduced rate.
