Right now, it is a frightening time for many people when it comes to looking at the economy and our own finances. To say that things are tight is probably an understatement for a lot of families. What are some ways that we can mitigate this, though, especially for those of us struggling under the burden of expensive loans?
Today, I will be writing about one of those options, though I will note that it may not be a solution for everyone. Rather, it is something to keep in mind if you have a loan that can be refinanced or renegotiated in some way, as a lot of them were made during times of economic prosperity. Now that inflation is on the rise and interest rates are sinking, many people are re-examining past credit agreements and looking to make a change.
If you find yourself among that group, stay around for this article. I will explain some of the process for you andgo into a deep dive on how it can benefit you in this day and age. With all of the crazy things happening around the world, I find it is good to get some perspective into what we can do.
What is Refinancing?
This is probably the main question that you are asking yourself right now. After all, while the word might seem self-explanatory, there much more going on than meets the eye. While you can get some details about what it is on this page, I will do my best to explain it as well.
At its core, it is simply replacing a previous credit agreement with a new one. The way it is done is by using the new funds that are disbursed and paying off the previous debt with them. So, you are able to create better terms for yourself if you want. That is usually the goal.
What are the Reasons to Try Refinancing?
Now that you know what it is, you might be wondering why you might want to do it anyway. After all, at first glance, it might not seem very appealing to take out another loan to pay off the first one. However, there are a few motivations a person could have to want to do just that!
One: to Consolidate Current Debts
This is most relevant for anyone who has multiple loans out at once, including credit card debts. If that sounds like something that you are contending with, this might be an option to consider. You can use a refinancing loan to essentially “buy out” those other debts, turning them into one singular loan and monthly payment that you have to deal with.
Ideally, it is best to do this when interest rates are down across the globe. That way, you are not making a worse deal than you had before. Given the current economic climate, interest rates do seem to steadily be going down. Thus, it is not a bad idea to do this now, if it is something you are interested in.
Two: To Lower Your Interest Rate
This is the reason that we usually hear about, so I think it is important to mention. If you look at websites like refinansiere.net/refinansieringslån/, you can see some examples of the interest rates available in refinancing. The aim, generally speaking, is to get a lower rate than the one you had on your previous loan.
Otherwise, the agreement will not be in your favor, so be sure to look at the rates before you make a decision. To do this, you may want to look not only at your current lender, but at alternative options as well. Essentially, the goal is to find the best offer that you can in terms of a low and fair rate.
Three: Lowering Your Current Monthly Payments
It is good to keep in mind that this is one reason that does come with a few caveats. Namely, if you do end up lowering your current monthly payment, your lender or creditor might change the time period in which you are repaying it. So, they might reset the time altogether, or extend it by months to years depending on your current circumstances.
So, while it can be done for this purpose, and often is, I like to mention that so you can keep it in mind. Otherwise, it can come as quite a shock if we are not prepared. That being said, if we are able to do this, it can often lessen the crippling weight of high monthly payments.
So, even with the potential downsides, it can often be worth it. Particularly if you are having a hard time handling the amount you are supposed to pay each month right now. An adjustment can really help out.
Four: Leveraging Your Current Equity
This is one that many are not familiar with, so I think it is worth mentioning. If you are looking to leverage your current equity, it might be a good idea to pursue a refinancing arrangement. What does this mean?
Before you try this, be sure to look at the current value of your home. If it is worth less than what you purchased it for, that is known as negative equity. In that sort of circumstance, it is likely not a good idea to refinance your mortgage, as you could actually be harming yourself.
However, if you do have positive equity, you can borrow against it to get an amount of cash. That can be used for something like a home renovation or remodel, as just one example. So, it is something to keep in mind if that sounds like something you like to do.
When Should You Refinance?
I have explained the circumstances in which you might want to do this, and what they are. What about the timing, though? This is probably the hardest part about considering one, as it is difficult to pinpoint an exact “right” timing.
That being said, there are still a few basic pointers that I can offer you, and hopefully they help (at least to an extent). One of the times you could consider it is if you want to pay off your loan more quickly. If you did not know, there are more often than not fees that a lender can charge you for trying to pay off a loan more quickly without some sort of refinance deal.
That is because their goal is still to make a profit, and when you sign a credit agreement, they expect to collect on the interest and fees that accumulate for the entire time of that agreement. When changes are made, obviously things will shift a bit. So, if that is a goal of yours, you may want to try refi.
As far as interest rates go, if you can lower your current one by at least two percent, that is generally a good time to try one of these deals. At least, that has been the historical precedent amongst the borrowing community. If you would rather wait for an even larger decrease, you certainly can.
There is risk in that, though, as the rates could easy go up again. Thus, it will largely be up to your own discretion, there. You might be asking yourself when you should not do it, though, so I will briefly touch upon that as well.
It is a good idea to look critically at your financial situation before you go through with any deal like this. If you are not feeling certain or good about it, it may not be a good idea. Additionally, if you are planning on moving out of a home soon, it may not be worth the trouble. Those are just a few things to keep in mind!