What is Refinancing?

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Dealing with loan payments can be uncomfortable and sometimes, frustrating. People don’t just take out loans because they are eligible or qualify for one. Applying for a loan is usually out of an emergency that couldn’t have been settled with one’s current financial status. Therefore, many borrowers in this state of emergency or panic go-ahead to take out loans, usually from private lenders, with absurd terms and interest rates. 

People who find themselves in this spot were making monthly payments to service their loan has become a true burden have the option of refinancing their loans. Refinancing simply involves replacing an existing loan with a new one that has better rates and terms, basically a loan you won’t have as much problem paying back as the existing one. 

Many borrowers who have taken advantage of this option have been successful in paying off their debts and in some cases saving extra cash in the process. That said, refinancing a loan may be a challenge if you have a record of defaulting on payments on the existing debt, this is often referred to as a “payment remark”. That said, however, refinansiere med betalingsanmerkning, which is how you say “refinancing with payment remark” in Norwegian, is still possible as there are banks that offer loans to borrowers with payment remarks. 

How Does Refinancing Work?

Borrowers typically choose to refinance an existing debt obligation to obtain more favorable terms, usually because of a change in economic conditions. The common goals customers hope to achieve from this process are to change the loan term, lower fixed interest rates, or switch from an adjustable-rate mortgage (ARM) to a fixed-rate mortgage or vice versa. 

A borrower may also opt for this option when there’s been an improvement in their credit score or profile. However, borrowers are mostly motivated by changes in interest rates. You see, interest rates fluctuate due to several factors like market competition, the economic cycle, or a government-issued monetary policy. To put all this in context, when rates rise, borrowers with variable-interest-rate loans pay more, and vice versa. Therefore, many consumers opt to refinance when rates drop for whatever reason. 

To refinance, the consumer may choose to either work with their existing loan provider or seek out a new one to fill out a new loan application. Irrespective of the loan provider the consumer decides to go with, the consumer’s financial situation and credit profile will be re-evaluated before refinancing can take place. Consumer loans that are refinanced typically include student loans, car loans, and mortgage loans.

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Steps Involved in Refinancing

The following are some of the common steps involved when a consumer decides to refinance a loan:

Step one: Apply

When applying, the lender asks for the information you provided when you took out the loan initially. The standard process involves evaluating your assets, income, and credit score to see if you qualify for a refinance, and to determine if you can repay the loan. 

Your lender may require the following documents from you:

  • Recent bank statements
  • Recent W-2s
  • Most recent pay stubs 

If you’re married, your lender may also ask for your spouse’s documents as well. For self-employed consumers, more information and documentation may be required to prove your financial status. As mentioned earlier, if for some reason you don’t want to do this with your existing lender, you can approach a new lender. Click here to learn more about a W-2 form. 

Once you begin the process, the new lender pays off the debt you owe to the old lender, thereby ending the relationship you have with that lender. If refinancing is something you want to do, you should consider shopping around to find the best terms, rates, and client satisfaction scores.

Step Two: Underwriting

After submitting your application, your lender initiates the underwriting process. This process involves verifying all the financial information and documents you submitted for the application. If you’re refinancing a mortgage, then details of the property will need to be verified; an appraisal will also be carried out to determine the value of the property. 

The property appraisal process is extremely important because it determines the different options that will be made available to you. For instance, the value of a borrower’s property who is applying for a cash-out refinance will determine how much cash will be received by the borrower. 

Before the appraiser visits your property as ordered by the lender, you should do all you possibly can to make your home look great. Cleaning up and fixing anything that is broken can go a long way in leaving a good impression. Putting together a list of upgrades that you’ve made since buying the home is also considered a good idea.  

If after the appraisal, your home’s value is found to be higher or equal to the debt you’re seeking to refinance, then the underwriting is complete. But if your property’s value is estimated to be less than the debt, you may be asked to decrease the amount you wish to cash out or cancel the application. 

Step Three: Lock Interest Rates

If your application is approved, the option to lock your interest rate may be given to you. A rate lock may last anywhere from 15 to 60 days depending on factors like the lender, the loan type, and your location. If you’re unable to repay the loan within the stipulated period, there’s no need to panic as the rate lock can be extended, however, the extension may cost you some money. 

The option of having a floating rate is also available to you. This means that the interest rate on the loan will fluctuate as the interest market fluctuates. With this option, you could end up paying a lower rate while also carrying the risk of paying higher. If you’re happy with the rates offered by the loan provider at the time of applying, you should consider locking it, so it doesn’t change. 

Step Four: Closing the Loan

Once the underwriting and appraisals are complete, your lender moves to close the deal by sending you a closing disclosure document. It is this document that contains the final numbers of the loan. All the people mentioned in the loan are present during the closing. It is also worth mentioning that closing is usually faster for a refinance than for a first-time loan. 

At this time, the consumer goes over all the details one more time before signing the documents, also, any closing costs not included in the loan are paid. In the case of a cash-out refinance, the lender deposits the funds into your account after closing.  

Consumers should know that despite signing the loan documents, they have a few days before they’re locked in. So, if for some reason you no longer want to go ahead with the process, you are allowed to cancel thanks to the right of rescission which you can exercise within the grace period of three days. 

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Example of Refinancing

Let’s consider a hypothetical example of refinancing. For the last 10 years, Laura and Antonio have been paying an interest rate of 8% on their 30-year fixed-rate mortgage. 20 years is left of the mortgage repayment period, but the couple would like to get a better rate since certain economic conditions have led to a drop in interest rates. 

The couple approaches their lender and is able to refinance the existing mortgage to get a new rate of 4%.  By doing so, Laura and Antonio have succeeded in lowering their monthly mortgage payment and can continue to do so if rates drop further in the future. 

Conclusion

Refinancing is one of the best ways to manage debt. But as mentioned earlier, the process becomes challenging for borrowers with payment remarks. Such people may have to shop around for a while to find providers who are willing to offer them a deal. It is advisable that consumers discuss with their lenders once they notice they may default on their monthly payment to avoid building a negative repayment history.

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