Refinancing is a viable way to strategically pay off your debt and increase the amount of spending money you have each month. While refinancing seems for many to be a daunting undertaking, the practice is rather common and, in most cases, pain-free. The application process takes very little time and will rely largely upon your credit score and mortgage payment history.
Before you apply for refinancing, it is important to understand what you are applying for, as it will permanently change your mortgage payments and may even change the terms of your mortgage. Refinancing may be difficult to understand, particularly if you do not have a mind for financial equations and strategy. Here’s some basic information about refinancing that can help to educate you before you make your refinancing decision.
What is Refinancing?
Before you can understand what is involved with refinancing, it is important that you understand what is involved with financing. Financing is a strategy that many people use to purchase large items, such as homes, education and sometimes even expensive cars. There are also so-called no teletrack payday loans, which are smaller ($100-$1000) and ideal for urgent unexpected expenses like a medical bill, car repair, etc.
The majority of people do not have enough cash to cover the cost of large-ticket items. As such, they will form a relationship with a bank or lender. The bank or the lender will provide the individual with money that the individual will then use in order to make his or her purchase. When the lender provides the money, he or she will, in essence, own the item until the entire loan is paid off. In the event that a loan cannot be paid off, the lender may acquire the item in exchange for the unpaid money.
When a lender finances a purchase, the lender will attach an interest rate to the amount of money that he or she lent to the purchaser. That interest rate is most often calculated on a monthly or annual schedule.
For example, if you borrow money to purchase a house, you will likely have an annual interest rate or 6% to 7% of the total amount of money that was lent to you. If you have a contract with your lender that you will pay off the debt over a period of 30 years, you will be paying that interest rate for the 30 years.
The good news for many individuals is that the interest rate that you pay on a home purchase is the deductible. However, you still have to pay the rate on a monthly schedule. This debt becomes taxing for many people. Therefore, many people choose to renegotiate the terms of the contract with the lender. When you renegotiate the terms of the contract, you are engaging in a refinancing procedure.
How Does Refinancing Work?
When you refinance your purchase, you will negotiate with your lender for a lower monthly or annual payment. The most practical way to negotiate this lower payment involves renegotiating the interest rate that you initially agreed upon. For example, if you initially agreed to pay 8% over a period of 30 years, you may renegotiate or refinance so that you can pay 7% percent over the coming years.
Often, there are fees involved with refinancing. Therefore, make sure that you understand the terms of your contract prior to applying for refinancing.
Keep in mind that just because you apply for refinancing, does not mean that you have to accept the offer. Therefore, it may be a good idea to apply for refinancing so that you can understand alternative options that are different than what you are currently paying. While refinancing is not possible for all individuals, it is possible and strategic for many people – especially those that have a high interest rate on the money that they borrowed (anything above 7-8%).