Refinancing is taking out a new loan to pay off an existing one. Refinancing allows the borrower to improve on the loan: get a better interest rate, extend the term and reduce the monthly payment.You can visit website to find out more about cash out refinance in California.
In addition, when refinancing, you can combine two or three loans into one, which in practice means paying off debts with the new loan, for example, on credit cards.
After the conclusion of the contract, a new payment schedule is drawn up, the initial debt is repaid ahead of schedule. At the same time, refinancing opens a new loan, which means it creates new obligations.
You can apply for refinancing at the bank where you get the first loan or at any other. The debts of microfinance organizations cannot be repaid in this way.
Refinancing goals
When refinancing, the money is not transferred to the borrower in the hands, they are immediately sent to repay the debt, including the body of the loan and interest on it at the time of closing the contract. They cannot be spent on purchases.
Basic goals:
- improvement of payment conditions;
- extension of the return period;
- reduction of the monthly load;
- transition to a more convenient bank;
- preventing the growth of debt.
Refinancing is used to close debts on consumer and target loans, as well as debts on credit cards.
Why are banks cutting rates?
Refinancing eases the financial burden on the borrower. In a situation where the client cannot cope with payments, the bank can lose more: the sale of collateral takes a long time, and in the event of bankruptcy of an individual, the residual amount of funds is divided among all creditors. But if you offer more loyal terms, the client will pay off the debt, and the bank will receive an estimated profit.
In addition, when refinancing loans from third-party organizations, the bank receives a new client. In addition to paying interest on the loan, the borrower will pay insurance, can transfer his accounts and deposits to a new bank, open credit and debit cards, open a new loan in the future. In other words, it will bring income to the bank.
What loans are refinanced
You can reschedule mortgages, personal loans, car loans, and credit card debt. If debt collection procedures are carried out against the borrower, the bank will not approve refinancing for the client. In addition, some lending institutions do not allocate funds to repay loans received from microfinance organizations operating without a banking license.
Why refinancing might not be profitable
Refinancing is beneficial only when the difference in rates is at least 2%. If the loan amount is not very large and more than half has been repaid, even a reduced rate is not a guarantee of savings.
In some cases, you have to spend a certain amount of money to open a new loan and pay off the old one. For example, sometimes when refinancing a mortgage in a new bank, you need to pay for the execution of certificates, collateral, notary services, appraiser, insurance premiums. After all the fees, it may turn out that it was more profitable to deposit this amount to pay off the debt, rather than enter into a new contract.
Also, if you extend the term of the loan, the interest overpayment may be greater than the potential benefit. In this case, refinancing is only appropriate if the current monthly payment is too high and you cannot meet the schedule.
The credit organization makes a decision on each client separately. In most cases, if the delays occurred due to technical reasons or did not exceed a working week, then the bank can approve the application.
When a positive decision is made, the client is invited to the bank branch, where the loan agreement is concluded, the documents are re-executed. In particular, if the original loan was secured by real estate or other valuable property, then the right to receive compensation in case of non-payment of the debt passes to the new creditor. To transfer money, payment orders are used or an application is filled out according to a standard sample. When refinancing several existing loans, all financial transactions are performed separately.
After refinancing, you must take a certificate of full fulfillment of obligations. Sometimes, after closing a loan, as a result of technical errors, an unaccounted debt remains – a transfer fee, a late fee. The certificate received after you closed the loan will protect against the accrual of interest on this debt.
