Mortgage Refinance Calculator
Refinance Loan: What Is It?
To “finance” a purchase means to provide funds to pay for a product or service. For major purchases such as a home or a car, a lending institution can help buyers finance the purchases they want to make. This is done with borrowed money (a loan) where a buyer uses lender money to fund a purchase.
To “refinance” something means to replace existing debt by using another debt obligation to pay off the original debt. However, there are different terms that come with a refinance loan than a normal loan. This is due to projected risk, banking regulations, a borrower’s credit rating, and creditworthiness, among many other factors.
Many borrowers will refinance a loan in order to get funds during financial distress. This can be a method of debt restructuring, but the debt (and the interest on the refinance loan) will still exist.
Should You Take Out a Refinance Loan?
Not everyone will need to take out a refinance loan, especially if their income is stable and they are keeping up on everyday payments for bills and assets. Common reasons to get a refinance loan include:
- Obtaining a lower interest rate they can keep up with.
- Shortening the term of a mortgage payment.
- Consolidating current debt.
- Changing a current loan from an adjustable-rate mortgage to a fixed-rate mortgage that’s locked in.
- Covering the cost of unforeseen expenses or financial burdens that they can’t pay off.
You should always make sure that you’re doing a refinance loan for the right reasons. If you have already been paying off your home and doing well with payments, you will essentially be reborrowing all the money once more. If you’re close to paying off that asset or other large purchases, smaller types of loans may be better for your financial situation than a refinance loan.
If you’re struggling to keep up with your current mortgage payments, a refinance loan can be handy because you can lower the interest rate. You only want to do this if you can reduce that interest rate by about 2% or more. Wait for interest rates to drop, which can help shorten the length of your mortgage term over time.
Pros and Cons
When it comes to loans, always work with a reputable lender such as our professionals at Lending Studios. Many borrowers get stuck in a debt trap because they haven’t read the fine print on their loans or they don’t know how payments and interest work. Make sure you know all the terms and are committed to making payments. Don’t take out a refinance loan if you don’t have a steady income or a way to make payments, as you are borrowing money using your home as leverage.
This is one of the cons to a refinance loan. Your home could be at risk and you could lose all the work you’ve already put into with paying off your home if you are close to the end. However, many borrowers love a refinance loan because of the benefits:
- Lowering interest rates over time, which means significantly less paid in interest fees.
- Having money when you need it.
- Changing your mortgage to fixed rates instead of ones that fluctuate, which can definitely save you money over time.
- Tapping into equity when you need to make large purchases or do home renovations.
- Reducing interest more quickly so you increase the rate of the equity you build.
Calculating a Refinance Loan
Before you take out a refinance loan, know the pros and cons. Bring all important information to your consultation so we can determine interest rates, risks, your income and more. You want to calculate the total cost of a new loan compared to an existing loan you already have. Factor in closing costs, interest paid for the life of the loan and prepayment penalties. Many loans also require some type of insurance payment.
Know what the fees are for penalties. Bring your income statements, bills, work information and documents such as a driver’s license and social security card so we can do a credit check. With all the right information, Lending Studios can set up a refinance loan that works for you.
Taking Out Your Refinance Loan
Lending Studios works with borrowers every day. When a refinance loan is in your best interest, we can help get you qualified and provide all the best tips for keeping up on payments without tons of financial distress.
We will look at your other debt obligations when qualifying, which means we will review sources of high-interest debt on credit cards, other loans and assets. You don’t want to take out a refinance loan to simply use the funds and not pay them back. However, a refinance loan can be a great financial move in many situations, and Lending Studios can help you know if you’re in that situation. Call us today for your free consultation!