Researching loans and borrowing opportunities has probably led you to coming across an option called refinansiering, or refinancing. The term itself might have given you a hint on what it really is and what it entails, but you’re probably still not completely knowledgeable on it, meaning you still have a few holes in that knowledge to fill, holes that are making it difficult to understand this actual concept. Naturally, that has to change, especially if you’re guided by the idea of actually using refinancing to your advantage. You’ll need to have the term properly defined, understand how all of it works, as well as get familiar with the actual refi types, so as to know which one you need or want.
What is Refinansiering?
When wondering about refinansiering, the first thing you’ll want to comprehend is what it really is. So, hva betyr this particular concept, or what does it really mean? The term alone can give you a hint on that, leading you to thinking that it consists of financing something again, i.e. something you’ve financed before. Well, you’re on to something, but let’s cut right to the chase. If you have a credit agreement already and you want to revise it so as to replace its terms for different ones, then you essentially want to refinance it. Most usually, it relates to a personal loan or a home mortgage.
So, changing the terms of the credit agreement is the main goal, but why is it done at all? What are the borrowers trying to achieve with this option? Certainly not to get poorer terms than the ones they already have. Instead, their aim is to make quite favorable changes to interest rates, repayment periods, or perhaps other terms that are outlined in their agreements. What’s favorable for you, though, may not be favorable for me, and vice versa, when it comes to these terms, except when it comes to the interest rate, because lower is always better with those.
Changing the personal loan or mortgage terms for the better is not always possible, though. It depends on multiple factors, starting with the actual situation on the market leading lenders towards setting specific interest rates and other terms, that can be higher and lower, or more and less favorable from one period to another. If the market is changing in a way that’s favorable for borrowers, it means that the interest rates they got on their previous loans will be higher than the ones they can get today, which is precisely why they turn to refinancing. If, on the other hand, the market is changing for the worse in this regard, it’s best not to refinance.
The market situation, however, is not the only factor playing a role here. Your specific financial circumstances have a say in it as well. Increases or decreases in income can also lead people towards wanting or needing to refinance, and so can changes to the credit score. Increases in income can mean that you’re now capable of repaying the loan faster and getting out of the debt, if you only change the previous borrowing terms to shorten the repayment period and consequently increase your monthly installment. On the other hand, a decrease in your income can have you needing quite the opposite, i.e. wanting to decrease the monthly installment so as not to struggle with paying it, and doing so will have you extend the period of repayment.
Income changes clearly influence your need for refinancing, but so does your credit score, as hinted at already. Credit score impacts the terms you’ll get on a loan, and if you’ve seen an improvement compared to the previous period, i.e. the period in which you actually borrowed money in the past, then you might be eligible for better terms right now. Including better interest rates, of course. Getting better interest rates, i.e. lower ones, ultimately leads to saving money, which is a great refi benefit, and also one of the biggest reasons why people decide to use this opportunity.
Here’s more on the topic of refinansiering: https://en.wikipedia.org/wiki/Refinancing
How Does It Work?
Understanding how this works is not difficult, because it’s no different than any other loan you can get. The new loan will, however, serve to meet those common goals of getting a better interest rate, consolidating debts, switching from a variable to a fixed one or vise versa, changing the repayment schedule, and similar. In order to do so, you’ll simply have to approach a lender, either your existing one or a new one that you’ll find and that will be ready to offer you the refi option, explain your situation and let them know clearly what you need. Your financial situation will be re-evaluated and you’ll be offered new terms by the lender, at which point you’ll need to compare those to the old ones, so as to figure out if refinansiering is favorable for you at that point in time and if the new terms you’ll get are better than those existing ones.
Which Types Are There?
There are several refi types to consider, and learning about those will help you figure out which one’s best for you. The most common one, i.e. rate and term refinancing is basically when you repay your original loan by basically replacing it with a new one, all the while aiming at getting better interest rates and better terms overall. Lower interest payments are the goal of this specific type, meaning you’ll ultimately get to save money on interest from using this option. That is, of course, as long as you make sure that the new rates and terms are more favorable compared to those you have right now.
Cash out refinancing is also a popular option, and it is usually related to mortgages or to personal loans that have been backed by collateral. If the value of your home, or of any underlying asset that’s used to back your loan, has increased, you can basically gain access to the mentioned value through a loan rather than selling it. The total amount of loan will be increased, but you’ll get the cash from the increased value while maintaining ownership over the asset.
If you have pretty unfavorable interest rates across numerous credit products, you can repay all of those debts through the consolidate refinancing option, i.e. by getting a new loan to close all the other agreements and pay off the debts. The new loan will, of course, need to have a more favorable interest rate than those other debts, so as for this option to pay off. Another type, the cash-in refi to be more precise, allows you to paydown a portion of the loan for a lower LTV (loan to value ratio)or for smaller loan payments.