Refinance a Loan;- Is your loan interest rates going up much more than you can pay? Not to worry, you can opt-in for loan refinancing. It’s simply borrowing a low-interest loan to fund an existing high-interest loan. Although, some people refinance loans in other to lower their repayment amount. Be it as it may, this post will not only enlighten you on what it means to refinance a loan, it will also show different options available for loan refinancing and the best options to go for. Only keep reading.
First off, if you happen to be a debtor struggling to pay off your loans. Or you have a high outstanding repayment amount. As such you can apply for loan refinancing.
Refinance a Loan – What is Loan Refinancing?
To start with, the whole idea around loan refinancing is to gain or replace the debtor’s obligation with more favorable terms.
To do that, a borrower takes out a new loan to pay off their existing debt. And the terms of the old loan are replaced by the updated agreement. Sometimes loan refinancing is as easy as just walking to your lender and apply for refinancing. Most lenders offer their consumers options for refinancing.
However, if you happen to purchase loans such as mortgages and car loans. Thus, refinancing might be a bit unfavorable. The reason has been that these types of loan refinancing come with higher interest rates than purchase loans.
Is refinancing worth it and how does refinancing work?
Of a truth, there are a variety of ways to refinance your loans. Thus, finding the right loan depends on your goals. In other words, you may want to switch from an adjustable-rate loan to a fixed-rate loan that has a steady monthly payment.
Or you may want to shorten the term of your loan from a 30-year to a 15-year and save yourself a bundle in interest charges.
Be it as it may, most homeowners opt for a straight rate-and-term refinance that lowers their interest rate and gives them a comfortable repayment term.
On the other hand, some want a lower monthly payment to free up money for other expenses, such as college tuition or an auto loan.
Take a look at the table below, it shows the role refinancing a loan plays;
30 Year Mortgage Before Refinancing After Refinancing
Interest Rate 6.75% 4.00%
Monthly Payment $1,946 $1,432
Savings — $514
Student Loans Refinancing
Refinancing your student loans can save you thousands or lower your monthly payment. Student loan refinancing saves borrowers money by replacing existing education debt with a new, lower-cost loan through a private lender.
Reputable lenders will warn you of the risks of refinancing federal loans even as they tout the benefits, and you should have stable personal finances and emergency savings before taking those risks.
Thus, for those who qualify for a lower interest rate, student loan refinancing may help you accomplish one or more of these goals:
- Payless interest over the life of the loan
- Pay off education debt faster
- Reduce monthly student loan payments
- Release a co-signer
- Refinance a parent loan in the child’s name
Credit Cards Refinancing
Credit card refinancing is the process of moving your credit card balance(s) from one card or lender to another.
One such way to do this is by using a balance transfer credit card. A borrower can essentially pay off their credit card(s) with a brand-new balance transfer card that comes with a low- or non-existent interest rate.
With a 0% interest rate, this hypothetical borrower would pay nothing in interest throughout the promotional period and therefore have a better chance at making a dent in their credit card balance. For example, say a borrower has $10,000 in credit card debt on a credit card that charges 20% interest.
By switching to a 0% interest card, and making payments on time, they could save around $2,000 in the first year alone (provided there are no other fees or penalties). If the borrower switched to a card that charged 10% interest in the first year, they could save around $1,000.
Perhaps unsurprisingly, there’s a catch. Low- or no-interest promotional periods don’t last forever, and cards often charge a “balance transfer fee,” which can be 3% to 5% of the total balance.
That means with a 5% balance transfer fee, for example, our hypothetical borrower with $10,000 in credit card debt would pay a balance transfer fee of $500. The borrower would need to weigh the fee against the potential savings.
However, credit card refinancing is, more than anything else, about lowering your interest rate. It tends to be less effective than debt consolidation at getting out of debt since it really moves a loan balance from one credit card to another.
How to Refinance Credit Card Debt
Credit card refinancing cuts your interest rates by either transferring the debt from multiple credit cards to a single credit card. But with a lower interest rate or consolidating your credit card debt into one monthly payment through debt consolidation.
There are five ways to go about this:
- Balance credit card transfers
- Nonprofit debt consolidation through a debt management plan
- Debt consolidation loan from a bank, credit union, or online lender
- A loan from a 401k plan
- Home equity loan
The options right for you depends largely on your credit score. Those with poor credit scores, for instance, won’t qualify for balance transfer credit cards. And may struggle to get a debt consolidation loan they can afford.
On the other hand, a nonprofit debt consolidation is always an option because your credit score is not a factor.
Mortgages Loan Refinancing
A mortgage refinance replaces your current home loan with a new one. Often people refinance to reduce the interest rate, cut monthly payments, or tap into their home’s equity.
Be it as it may others refinance a home to pay off the loan faster, get rid of FHA mortgage insurance, or switch from an adjustable-rate to a fixed-rate loan.
In detail, when you buy a home, you get a mortgage to pay for it. The money goes to the home seller. When refinancing a home, you get a new mortgage. Instead of going to the home’s seller, the new mortgage pays off the balance of the old home loan.
Mortgage refinancing requires you to qualify for the loan, just as you had to meet the lender’s requirements for the original mortgage. Thus, you file an application, go through the underwriting process and go to closing, as you did when you bought the home.
People refinance mortgage loans for different reasons;
Before you begin, consider why you want to refinance your home loan. As such, your goal will guide the mortgage refinancing process from the beginning.
#1: Reduce the monthly payment
When your goal is to pay less every month, you can refinance into a loan with a lower interest rate. Another way to reduce the monthly payment is to extend the loan term — say, from 15 years to 30. The drawback to extending the term is that you pay more interest in the long run.
#2: Tap into the equity
When you refinance to borrow more than you owe on your current loan, the lender gives you a check for the difference. This is called a cash-out refinance. People often get a cash-out to refinance and a lower interest rate at the same time.
#3: Pay off the loan faster
When you refinance from a 30-year mortgage into a 15-year loan, you pay off the loan in half the time. As a result, you pay less interest over the life of the loan. There are pros and cons to a 15-year mortgage. One downside is that the monthly payments usually go up.
#4: Get rid of FHA mortgage insurance
Private mortgage insurance on conventional home loans can be canceled, but the Federal Housing Administration mortgage insurance premium you pay on FHA loans cannot in many cases. The only way to get rid of FHA mortgage insurance premiums is to sell the home. Or refinance the loan when you have accumulated enough equity. Estimate your home value, then subtract your mortgage balance to calculate your home equity.
#5: Switch from an adjustable- to a fixed-rate loan
Interest rates on adjustable-rate mortgages can go up over time. Fixed-rate loans stay the same. Refinancing from an ARM to a fixed-rate loan provides financial stability when you prefer steady payments.
Auto Loans Refinancing
Refinancing a car means you take out a new auto loan and use the funding to pay off your existing loan.
As such, you’ll still have car payments. But you’ll have a new loan agreement that might offer better monthly payments, a lower interest rate, or a different term (length) of the loan.
Most car owners choose to refinance their loans to lower their monthly payments.
If a borrower is in danger of defaulting on their debt, a restructured auto loan agreement can help get their finances back on track.
However, banks usually have specific eligibility requirements for refinancing, including the age of car restrictions, mile caps, and outstanding balance limits.
If you’re in financial distress and need a loan restructuring, it’s best to reach out to your loan servicer. And communicate to them your personal financial situation.
Small Business Loans Refinancing
Usually, refinancing a small-business loan is a pretty straightforward process, but equip yourself with knowledge before you begin.
The mechanics of refinancing a business loan aren’t that different from refinancing a mortgage or a student loan. The process involves getting a new loan to pay off your original loan. You then make payments on the new loan going forward.
“When you refinance a business loan, the terms you get are typically based on what the original purpose of the debt was,” says Maggie Ference, SBA program director at Huntington National Bank in Columbus, Ohio. “In cases where the purpose of the debt is tied to an asset that might be past its useful lifespan, such as a piece of equipment, the refinance terms can be more aggressive.”
At this point, debt refinancing is an attractive proposition. Taking out a new loan to pay off old debts, with better rates or fees, can reduce your monthly payments.
Many lenders offer debt refinancing services, but, thanks to low-interest rates and renewal by Congress. The SBA 504 Refinance Program is a very attractive option for small businesses.
With advocates such as the U.S. Chamber of Commerce, National Association of Women Business Owners. The International Franchise Association, and more, the SBA 504 Program offers exceptionally low fixed rates. And a low down payment for refinancing eligible fixed assets.
Refinancing through the 504 Refinance Program
If you’re paying steep loan repayments for real estate (such as hotels, gas stations, daycare facilities, and assisted living) or other major capital expenditures (land, equipment, etc.). SBA debt refinance can help. Under the 504 program, eligible business owners can borrow up to 90% of the value of their property, with a 10% down payment by the owner. Rates are fixed for a 20-year term.
As an SBA-approved lender, 504 refinancing is available through First Bank SBA with the added benefit of same-day proposal assistance. And loan approvals within three business days.
How to Refinance a Loan
Here are five steps to refinancing a loan.
Pre-qualify for a new personal loan – Pre-qualify with multiple lenders to see the rate and terms you can get on a new loan and how they compare with the terms on your existing loan.
Consider refinancing costs – Add up the new loan’s interest and fees and compare them to your existing loan to determine whether refinancing will save you money in the long-term.
Use the new loan to pay off your current loan – Most lenders transfer funds to your bank account instead of directly paying off your first loan. It’s up to you to pay off the existing loan.
Confirm the old loan is closed – Check your account to ensure there’s no balance on your first loan to avoid additional fees.
Start making payments toward the new loan – Most lenders allow you to set up automatic, recurring payments from a checking account.