For those are not too clued up on the lingo involved when talking loan application, refinancing is one of those. To put it simply, this refers to a method of reviewing and changing the rapports of the original contract or agreement you made with the loan or mortgage finance company regarding your existing house.
For illustration purposes, when an individual decides to refinance or “refi” a loan or mortgage, they will look to make changes to the original agreement in terms of its payment schedule, credit or interest rate, and any other terms and conditions outlined in the document.
When the changes have been approved by the proper authorities then a new agreement or contract is drawn up and signed by all those involved and this new paperwork will take precedence over the other which is now void. One of the main reasons for doing this is when the interest rate environment has changed significantly and will result in savings.
4 Refinancing Options to Choose From
There are 4 different refinancing options one can choose from or be given by the authorities, based on their current circumstance, which we look at below.
Consolidation Refinancing: Depending on the situation, a consolidated loan may just be the right decision to make. This can be used when an investor acquires a single loan that has a lower rate than the existing regular interest rate, of the different credit options.
This will entail applying for a new loan while the rates are low and paying off existing debt with the new one, this leaves the owner with substantially lower outstanding principal or interest rate payments.
Cash-in Refinancing: This is the second option you could choose. This one allows you, as the homeowner, to put down a certain portion of the loan, for a lower LTV or loan-to-value ratio, in other words, you can make smaller loan payments. Click here to read about this option some more.
Rate-and-Term: Out of all, this is the most common one. This takes place when the original loan is paid and also replaced with a new loan agreement which falls under a lower interest rate.
Cash-Out Refinancing: These are common as well, especially when the asset that the loan is based on has increased in value. This is a transaction that involves, withdrawing the equity or value of the loan amount in exchange for a higher one with a higher interest rate as well.
If the asset increases in value, then you can gain access towards that value with the loan, instead of selling the property or asset in question. With this option, you can increase the loan amount and you as the borrower can gain be lent cash sooner while still maintaining possession of the assets.
Advantages of Refinancing
Of course, anything that is financially related must be checked properly before jumping into signing any papers, much in the same way is this aspect. There are also bigger institutions that offer these options such as the bank of America for instance, or Bank Australia: https://www.bankaust.com.au/support/faqs/borrow/refinance/how-do-i-refinance-my-home-loan-with-bank-australia but their interest rates and loan repayment regulations may be slightly more black and white or rigid.
These institutions usually have a stringent pre-screening process and any mistake they find on your credit reports will count as a negative towards your loan application or refinancing application. They often use credit rating agencies to do the paperwork for them, which means additional costs for you in labor and servicing fees.
When you opt to take up the option of a refinance mortgage application, there are a few advantages to this, which we have included for you below.
- You have the option to pay a lower mortgage repayment monthly as well as lower interest rates as well
- You can get an influx of a large amount of cash if you require an emergency fund or need to meet a deadline for financing your first home.
- You can easily convert the adjustable interest rate that you are currently on, to a fixed interest rate, which could help save you some money and gain some momentum.
- When changing your loan term, you can change it or set it to a shorter one, which means you pay less interest in a shorter time allowing you to save a significant amount of funds.
There are other forms of this too, aimed at large companies such as the corporate refinancing option but this is mainly done for existing companies that want to be in a better financial standing or needs help repaying a debt, or rectifying financial problems. Finding out what your closing costs will be and factoring in any of the above-mentioned types, can help you decide which one is the best one for you, and so will your advisor.
If, however you plan on selling your property before the mortgage term time is due, there may not be any point in applying for this. Get the best advice from the right services before making any decisions.