There are many financial strategies and products that consumers can engage when in a financial bind. One of those strategies is taking using their home as collateral for refi loans. The process of taking out a refi loan is known as refinancing and it entails taking out a new credit facility to replace an existing loan; taking out the refi loan with property as collateral entails using one’s property (house or land) as security for the loan.
Refinancing using housing or land as collateral enables a homeowner to access equity, consolidate debts or get better loans terms and rates. This financial product comes with some benefits which include reduced monthly payments, lower interest rates or an inflow of cash that borrowers can use for capital intensive projects. Although this product is beneficial to borrowers, it comes with some risks and conditions that must be considered.
In this article therefore, we aim to help the reader understand the basics of refinancing. We will also explore refinancing with security in housing (i bolig in Norwegian), the risks and consideration and the pros and cons. At the end of this article, you would have a clear understanding of what this financial strategy entails and be better equipped to make an informed decision; so let’s dive in!
Understanding Refinancing
Like we have mentioned briefly, refinancing is the process of replacing an existing credit facility with a new loan. This new credit facility typically comes with better terms and rates which is usually the major reason why people seek refinancing. Borrowers look out for new credit agreement that has more favourable conditions that can help ameliorate their financial situation.
Although borrowers can get refi loans without collateral, having an asset to put down as security helps a lot. When a borrowers use their home or property as collateral for a new loan, they stand a better chance of getting better loan terms and conditions. This is because the lender considers a borrower with a property as collateral as a lower risk customer than an applicant seeking for refi without collateral.
Reasons for Refinancing with Property as Collateral
The reasons why consumers seek refi with their property as collateral can also be said to be the benefits of the process. The following are some reasons:-
Lower Interest Rates
The most common reason for majority of borrowers seeking refinancing is that they can get lower interest rates with the new agreement. Interest rates are not static; they fluctuate depending on market trends and conditions. Therefore if interest rates have reduced from the time the borrower took out the existing loan/mortgage, a refi loan can greatly reduce the total cost of their loan.
Reduced Monthly Payments
If in the process of refinancing, you get an extended loan term or reduced interest rate, you can get lower monthly payments. This gives you some reprieve with your monthly expenses.
Debt Consolidation
This is another reason why one will seek refinancing; it can be used to consolidate expensive debts. To do this, the borrower put together all the small loans such as personal loans or credit card debts into a lump sum loan. This can help borrowers simplify their finances and also reduce the amount of interest paid across the different loans.
Accessing Home Equity
There are different options in refinancing with property as collateral and one of them is the cash-out refinance. This option allows the homeowner (borrower) to access the equity in their home in order to get substantial cash for major projects. These projects can be education (most often college bills) or home improvement.
Changing Loan Terms
A homeowner can decide to refinance so that they can change their loan terms. They may want to switch from a fixed rate mortgage to an adjustable rate mortgage or the other way round. Some people decide to switch from the adjustable rate to the fixed rate because they desire some level of stability with their monthly payment which can also protect them against any hike in interest rates in the future.
You can visit https://www.theglobaleconomy.com/ to see the interest rates on mortgage in Norway.
Guide for Refinancing
No matter how much benefit there is to a process, if you do not understand it as you should, you stand the risk of not getting the benefits or short-changing yourself in the process. In order to gain the full benefits of this process, there are certain steps to take and we highlight some of them below:-
Evaluate Your Financials
Before you decide that refinancing is the way to go, you have to critically evaluate your finances and financial situation. Find out information such as how much equity you have in your home, your debt-to-income ratio and your credit score. If your credit score is high and the equity in your home in significant, then you stand a better chance of getting a refi loan with very favourable terms and rates.
Set Your Goals
You must also clarify the reasons for which you want to refinance. Answer the following questions:-
- Do you want lower monthly payments?
- Do you want lower interest rates?
- Do you want to access a substantial amount of cash?
- Do you want an extended loan term?
- Do you want to change your interest rate terms? e.g, from fixed interest rate to adjustable?
Honest answers to these questions will help you make an informed decision on the option of refinancing to pursue.
Carry out Comparative Shopping
When or if you decide that refinancing is the way to go, ensure that you do your due diligence. Start out by talking to your current lender; if your discussion does not yield the desirable outcome, move to other lenders. Compare their fees, interest rates and the total cost of the loan.
There are also comparison tools online that can help you make informed decisions. If this process is too tedious for you, you can engage the services of mortgage brokers or loan agents to help you streamline and simplify the process.
Put in your Application
After the fore-going steps and you have decided on a lender, go ahead and put in your application. Have your documentation handy; what you need would include proof of income, information about your existing mortgage and your tax returns.
You may want to apply to more than one lender; this is where the services of a loan agent come in handy. With these agents, you only need to fill one form and provide one set of documentation. The agents would use that information to reach out to as many lenders as possible and endeavour to get the best deal for you.
Home Appraisal
When you put in an application for refi with your property as collateral, the lender will definitely ask for an appraisal. This is to help them determine the value of your home or whatever property you are putting down in the market. It is this appraisal that establishes the amount of equity you have which also determines whether the property is sufficient collateral for the amount you have applied for.
Click here for tips on how to prepare for a home appraisal.
Loan Approval and Closing
After your application is approved, the next step is the closing. This process entails that you sign documents for the new loan, pay closing costs if any and get the approved loan sum. Note that the money will be used to pay off the existing loan and if you have extra money after this payment, it will be paid into your account. This is mostly predominant in a case of cash out refinancing.
Risks and Considerations
Before we round up this article, let’s briefly give you a list of things to consider and the risks that come with refinancing with your property as security:-
- Closing Costs – These include application fees, title insurance, appraisal fees and other expenses. Factor in all these fees to be sure that the loan is still worth it at the end of the day.
- Loan Term Extension – Although this reduces the monthly payments you have to make, they can impact on the total interest you pay at the end of the loan term.
- Risk of Foreclosure – Foreclosure is the legal process of repossessing your home in the event that you default on payment. So make sure that by your calculations, you can conveniently pay back whatever sum you are applying for so that your home will not have to be foreclosed.
- Market Fluctuation – This can negatively impact on your home equity if the fluctuation leads to a decrease in the value of your home. You will also be left with a debt that is higher than the value of your home.
- Your Credit Score – When you apply for refi, a credit check is carried out on you. This can temporarily affect your credit score negatively, but you can quicly bounce back by being faithful with your loan repayment.
Conclusion
Refinancing with your property as collateral is a financial tool that can yield great benefits. However, this will only happen if you have a good grasp on the subject and know how to go about it. If you are still unsure about how to make the best use of this tool, we recommend that you consult a financial expert or advisor.
Andrej Fedek is the creator and the one-person owner of two blogs: InterCool Studio and CareersMomentum. As an experienced marketer, he is driven by turning leads into customers with White Hat SEO techniques. Besides being a boss, he is a real team player with a great sense of equality.