Statistics have it that a higher percentage of people are in debt these days than in times past. There are a number of reasons why people get in the ‘bondage’ of debt; these reasons range from high interest rates to unforeseen financial crisis. Sometimes it is also due to the lack of discipline of the borrower.
Whatever the reason for the debt, the good news is that one can always get out of it. There are a number of ways through which one can dig oneself out of the pit of debt, one of those ways is refinancing of debts.
In this article, we will help you understand what the concept is all about and the pros and cons; stay with us for more details.
What Is Debt Refinancing?
Some people confuse debt refinancing with debt consolidation but they are not the same thing. The former involves getting a new loan to offset an old one, while the latter involves getting one loan to offset several others.
With consolidation, you take out one loan to pay off several loans so that you have only one payment per month and not several. Refinancing on the other hand is just taking out a new loan with better terms and conditions to offset an old one. A typical debt refinance option is with mortgage loans.
A person may decide to take out another mortgage from another financial institution because their terms are more favourable. The new loan is used to pay off the old one and then the borrower continues with the new lender.
While this option helps to ameliorate the debt issue, it doesn’t get to the root cause especially for chronic debtors. So if you need help with debt management, you can check out this article.
Additionally, it is very important that one considers that pros and cons of this option before deciding that it is the way to go. Therefore we will look at the pros and cons of refinancing and how to make a good choice.
Pros Of Refinansiering Av Gjeld
Truth be told this concept is a valid means of paying off lingering or problematic loan and we will discuss briefly some of the advantages thereof. Let’s look at the pros of refinancing a mortgage:-
Likelihood of Getting a Lower Interest Rate
Many things must have changed between when you bought your home and presently. These may include, your finances/income, the state of the real estate market and the value of the property. If you get a new loan with lower interest rate, it means you will make smaller payments every month with a larger chunk of payment going into the payment of the principal of the loan.
You Can Shorten the Duration of the Loan
Most mortgages span duration of 30 years and this means more interest will be paid. But if you refinance when interest rates are lower, you will save on the interest you have to pay. This is because the repayment period is shorter- say 15 years; you therefore save on interest.
Additionally, you get to be free of the burden of a mortgage faster with a shorter repayment plan even if you still pay the same amount or higher monthly.
You May Be Able to Get Cash From Your Home’s Equity
You build equity on a home when you’ve owned it for a good number of years and most likely carried out some home improvement and then finished your mortgage payments. With refinancing at this stage, you can get some cash from the equity you built to handle other issues or even just build a safety net.
Your Monthly Payment May Become Less Erratic
If your original loan was adjustable rate, it means that your interest rate fluctuated based on the market. This also meant that your monthly payments will not be the same. But if you refinance with a fixed rate mortgage, your payment becomes predictable.
With this new loan, your interest rate is the same throughout the duration of the credit. Bear in mind that this does not affect the escrow payment which is determined by insurance costs and property tax. However, the predictability of the monthly payment helps you to budget better and less unlikely to miss a payment.
You Might Increase your Monthly Savings
If you get a loan with terms that enables you make lower monthly payment than the previous one, it means you have more cash in your coffers. This extra cash gotten can be used to build a nice egg nest which can come in handy at any time.
You can check out technewsgather.com – refinansiering av gjeld for more insight on these advantages.
Cons of Refinansiering Av Gjeld
As with everything in life, whatever has advantages surely has disadvantages; let’s look at a few cons:-
Takes A Lot Of Time
The process of getting a refinance loan is quite long and tedious. You will have to spend time, resources and even money to get a loan with lower interest rate. If at the end of the day there is no exceptionally great change in the interest rate and therefore your monthly payment, then the stress would not have been worth it.
The Savings May Be Minimal
You might end up not getting as much savings as you thought based on your present interest rate. Unless your financial circumstance has changed a lot from when you bought the home to present day, there may not be much difference.
Bear in mind that there are fees to be paid in the process of refinancing. When you compare how much you will spend and what you’ll save, it needs to make sense before you embark on this venture.
Your Monthly Payment May Increase
If you switch from a 30-year plan to a 15-year plan, the fact is that your monthly payment will most likely increase. This is because of the shortening of the repayment period. Yes you’ll have lower interest to pay but the amount you pay monthly will be higher.
The Equity Of Your Home Can Reduce
Cash out refinance is an option that allows a home owner to borrow money against the equity of the property. So to take out this type of refinance loan, you will use the equity of the home which will in turn reduce it.
Imagine that the equity on your home is $60,000 and you take out a cash-out refinancing of $15,000, it means that you have $45,000 left in equity.
From all that we shared in this article, you can see that you need to carefully consider the pros and cons of this option before you make a decision. We recommend that you seek financial counsel and research more with deep consideration before you make a decision. A well informed decision is the only way you can enjoy the benefits of debt refinancing.