Refinancing: Explained

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Taking out a loan to help finance a real estate acquisition is a daunting responsibility. There is a good amount of optimism at the outset and a firm commitment that the debt will be repaid. However, some circumstances change, which could make it more advantageous to rethink the terms of the agreement. Fortunately, people are offered other options to meet their obligation instead of remaining bound to unfavorable conditions. Refinancing a loan is available for those who need further assistance.

Is it a good idea to refinance?

You should refinance if it will save you money. Do not do it if you will cause an unnecessary burden to your finances.

There are many reasons to refinance, but creating better circumstances for yourself is the top priority. It could free up more monthly cash to settle your other obligations. Some find the lower interest rates as a good incentive. Others prefer to switch from a fixed-rate mortgage to one with adjustable rates or vice versa. It could also be done to consolidate debts or to shorten a mortgage term. 

What happens when you refinance?

Essentially, you enter into a new loan to replace a current one in order to pay off the latter. Depending on your motivations, this new loan should create a better financial situation for you.

Generally, this is the refinancing process:

  • Your current loan’s payment terms need improvement
  • There is another loan which offers better terms
  • You apply for the new loan
  • It can settle the entire outstanding loan
  • The new loan is paid off according to its terms

Why would you refinance your home?

Reasons vary on a case by case basis, but the bottom line is it should create better circumstances for you. You might want to have easier monthly payment terms. Others look for savings on their current interest rates. You might also be looking for greater flexibility in case you are able to pay for the loan earlier. Whatever it is, you refinance to suit your purposes and not just because others are refinancing their homes as well.

Does refinancing hurt your credit?

Your credit score may be affected when a creditor conducts a credit check. It is standard procedure to do a hard inquiry into your credit information, which in effect causes the decline. Using your home equity to finance another loan would also be unwise because you increase your debt obligations. You might be viewed as a risky borrower, which can hurt your credit standing. Closing the account of your old loan can also work negatively against you because it is a long-standing account. 

Don’t fret. You can recover from these three instances provided that you are able to diligently pay off your new loan. Eventually, your credit stands to improve because of your on-time payments. 

Does refinancing really save money?

Yes, it does, but again you need to be clear on where the savings are coming from. You might want to consider paying higher monthly installments if it will shorten the term of your loan. This means fewer interest payments and more savings. Another option is to pay lower interest payments on your monthly rate. Before you refinance, calculate if this will really give you savings in the long run.

When should you refinance a house?

There are a multitude of factors for different people. Going into a new loan to replace an old one would be ideal if these two circumstances are present:

  • The interest rate is at least two percent lower than the old one. Some, on the other hand, would readily say one percent lower is fine.
  • You have determined that the cost for refinancing is something you can afford. 

Only when these basic circumstances are present should you start considering refinancing a loan. Note that there are other conditions to study depending on your requirements. 

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