Finance Frontier

One issue that is plaguing a lot of people today is the debt issue. A lot of people are drowning in debt without an idea of how to get out of it. If you are one of such persons, there is good news for you.

The good news is that you can get out of debt by refinancing; this is a process through which an existing loan is replaced by a new one with better terms and conditions. This term is often confused with debt consolidation which the process is when existing loans are lumped together and paid off with a new loan that has better terms and conditions. As a matter of fact, these two processes are quite similar but they are not entirely the same. Read this article to see the difference between the two concepts.

In this article, however, we will focus more on refinancing with the equity on your home, the advantages and disadvantages and how to go about the process.

Understanding Refinancing With Home Security

There are a number of debts that you can refinance by taking out a loan against the equity in your home. From credit card debts to consumer loans and other small credits; you can cash out on your home equity to liquidate them. This process can be facilitated by cash out refi.

Cash out refi happens when you convert the equity you have in your home to cash. What this means is that a new mortgage that is higher than the balance on your existing mortgage is approved; the new mortgage is used to pay the existing mortgage and the difference is paid to the borrower in cash. It is this cash that you can now use to settle other debts. 

You can also take out refi loan on a home that you have fully paid off the mortgage. In this instance, you apply for a secured refi with your home as the collateral. This type of refi is looked upon by banks and other lenders as guaranteed because the home stands as security that the debt will be paid.

Bear in mind, however, that this makes your home susceptible to foreclosure if you default on repayment. Therefore, this means that you need to think long and deep before taking the step. You also get better interest rates and higher loan amount; you can also get longer repayment duration if you want.

Application Process and Eligibility Criteria

The process for application for this type of loan follows the same pattern of mortgage loans. You have to apply for the loan and then the lender will assess your application. The first thing they do as mandated by law in Norway is to carry out a credit assessment.

This process is meant to determine your ability to repay the loan. In this case, the details of your home will also be assessed; if you still have mortgage running on the home, your equity will be determined. For homes that are no longer under mortgage, the total value of the home will be determined. Visit https://www.whatisvalueofmyhome.com/ to calculate the value of your home.

Another thing that the assessment will bring up is your credit score and this is based on your fixed expenses, debt profile and payment history. If your credit score is high, you are sure of getting approved for the loan and also getting lower interest rate. If, however, your credit score is low, you may get approved but for a lower sum and at a higher interest rate. 

Customers who have payment remarks are most likely not to be approved for loan. This is where the collateral of a home equity comes in. Your application stands a greater chance of approval with this collateral. But you need to bear in mind that you cannot get a sum that is higher than 85% of the market value of your home, which is the collateral.

Advantages and Disadvantages of Refinancing With Home Equity

So far we have discussed the basics of taking out a refi loan with the collateral being your home equity. Let’s now look at the advantages and disadvantages of this process:-

Advantages

The following are the advantages of taking out this loan:-

Helps Consumers Streamline Finances

If you have more than one debt that you need to pay off, you can consolidate them into one loan. You will take out a new loan to pay off all the debts that you have. Although we stated earlier that debt consolidation is different from refinancing, let us state here that there are similarities and this advantage is one of those similarities.

When you have only one loan to pay off, you will not be confused about which debt you have to pay at which time. Let’s say you have credit card debt and personal loan debt, you can do cash out refi and pay off the two debts. You can also just borrow some money with your home standing as collateral. Now you have only one debt to pay which means you cannot possibly miss out on any payment.

Helps to Expedite Payment

With a refi, you can pay off loans faster than you would have with the original loan. This is because you can get better terms and conditions which will enable you to pay off a debt that hitherto was too cumbersome for you.

Could Give You Lower Interest Rate

If during the course of your last loan, your credit score has increased, you can take out a cheaper credit facility with your lower score. This cheaper loan can then be used to pay off the existing loan and then continue servicing the cheaper loan. To get the best refinansiering med sikkerhet i bolig which is Norwegian for home equity refinancing, you need to shop around for the cheapest rates possible and be careful about hurting your credit score in the process. You can avoid hurting your credit score by asking for pre-qualification.

Pre-qualification means that the bank will let you know whether you are likely to be approved for a loan. However, the assessment process for this is a soft credit check that will not reflect on your credit score. It is only when a hard check is done on your account that the result reflects on your record and can affect your score.

Can Help You Reduce Monthly Payment

When you are looking to refi your debt(s), you can negotiate for a longer repayment period which avails you the opportunity of making lower monthly payments. Although this may add up at the long run, it can be advantageous to someone who already has too many monthly financial obligations.

Helps to Improve Credit Score

When you take out a cheaper loan with better terms and conditions, you are now able to pay off the debt when due which helps to improve your credit score.

Disadvantages

The following are the disadvantages of this credit facility:

Higher Loan Amount

One may wonder how this is a disadvantage; let’s tell you how. When you can put up your home as collateral for loan, you are qualified for higher loan amounts than someone who did not do so. Most times, the offer of a large sum can be so tempting that people collect higher sums than they actually need or can service. This in turn can dig you further into debt instead of out, which was the intent from the onset.

Can be More Expensive at the Long Run

This is usually the case when people refi to a longer repayment duration. The interest adds up over longer repayment duration and makes the facility costlier.

Can Affect your Home Equity

Borrowing so much on your home equity can reduce it by increasing the loan-to-value ratio of your home. This therefore means that you have to research properly on it before using your home for refinancing.

Conclusion

Refinancing is not as simple as it sounds but with proper research and guidance from financial experts, you can get it right. We have also shared some information to shed more light on the process and we believe that you will make an informed decision based on these tips.