Most borrowers, faced with an inability to pay off a loan, look for various options to help them get out of debt. The underlying issue is that the longer you can’t pay your loan, the faster your debt grows. There are several basic options for paying off outstanding loans owed to a lender or a bank. One of the easiest and most obvious ways is to refinance a loan. In simple words, refinancing is paying off one or more outstanding loans by taking out a new loan on better terms for the borrower. The new loan is used to repay the principal debt and fines and to eliminate interest arrears for the current period. Naturally, cash is not handed over to the client. The main objective is that the new terms allow the borrower to make the mandatory payments on the loan.
Refinance Goals
There are several primary goals for which refinance is arranged:
- Receive lower interest rates;
- Reduce the repayment amount of interest;
- Get a longer-term loan with lower monthly payments;
- Prevent accrual of fees, penalties, and, accordingly, the growth of debt;
- Pay a mortgage off faster;
- Pull Cash Out for home improvement or personal use;
- Transit to a more convenient and suitable loan.
Refinancing requires research and hassle, but it can be financially rewarding for borrowers who pursue the process through to its conclusion. Like any financing strategy, refinancing has its benefits and drawbacks.
Pros:
- Lower annual percentage rate
- Shorter repayment period
Cons:
- Longer-term implies a higher interest rate
- Origination fees
How to Refinance a Loan and What to Consider Before It
As it is already mentioned above, the refinance is replacing an existing loan with a new one. If you want to refinance a loan, consider the following tips:
- Examine the terms of your current agreement to see how much you are actually paying. Add the interest and fees for the new loan and compare them to your existing loan to determine if refinancing will lower your monthly payments or save your money in the long run.
- Check if there is a pre-payment fine on your current loan, as the cost of early termination could potentially outweigh the cost of refinancing.
- Pre-qualify with several lenders to see the rates and terms you can get on a new loan to find the terms that best fit your financial goals.
- After refinancing a loan*, pay off your current loan as soon as possible to avoid additional fees and ensure that your previous loan has no balance and is closed.
* Some private lenders transfer funds to your bank account, while others may directly repay your first loan.
- Start making payments toward the new loan.
Cash-Out Refi as a Type of Refinance
A cash-out is a refinancing that lets you convert home equity into cash, i.e., it’s borrowing against your home’s available equity, and utilize the funds as you see fit. This strategy allows you to use your home as collateral for a new loan as well as some cash, creating a new loan for a more significant amount than what is currently owed. It is an excellent option for homeowners who need on-hand cash for various needs. To qualify for a cash-out refi, most lenders require that you have more than 20% equity in the home you are refinancing. In a cash-out refinance, a new loan is taken out for more than your previous loan balance, and the difference is paid to you in cash.
If done suitable, cash-out refinancing can help you ease your financial situation. Firstly, you will pay off your existing first loan, including closing costs and any prepaid items. Secondly, you can use the cash for home renovations, house additions, college tuition, etc. But try not to spend extra money on things that won’t improve your financial situation, like vacations. Investing money back into your home to increase its value or paying off high-interest rates is a smart way to go.
What You Should Know Prior to Taking Cash-Out Refi as a Viable Option
A cash-out refinance loan is considered a term loan. The flexibility and fast approval make a cash-out refinance loan ideal for many real estate borrowers and investors. Versus conventional loans, this program doesn’t require income verification when applying. Still, it is subject to the borrower’s credit history and credit score, real estate investment experience, and liquid assets when underwriting. The loan is available through either a fixed interest rate or an adjustable one, but they are high anyway. Contact your private lender to get more detailed information about interest options and decide which fits your specific financial situation best. As for closing costs, they are usually similar to your original loan. However, the cash-out refi loan can’t be closed without Homeowners Insurance, so obtain it in advance. Keep in mind that a cash-out refinance loan is not a home equity loan – it is a second loan, which takes the first lien position.
Lending Bee Inc. is a trusted private lender with the best rates and a refinance policy in Cali. We don’t require extensive documentation and provide borrowers with little underwriting, making this a fast process ideal for investors with busy schedules. Scroll up and click “Apply Now” for loan approval!