There are several types of loans borrowed by businesses, companies or individuals based on the needs of the consumer. For example, term loans, bonds, lines of credit, etc. are borrowed by corporates and home loans, car loans, student loans, etc. are borrowed by individual consumers. All loans are borrowed from a lender as per certain terms and conditions like a rate of interest, repayment period and installments. However, due to various factors, the borrower might feel the need to make some changes in the repayment terms. This process of making changes is called refinance, and the amount charged by a lender to complete this change is called as a refinance rate. A refinance may be either in the form of changes regarding the loan or a replacement of an existing loan itself with a new one. A consumer may choose to refinance for different reasons like:
- To pay less interest by switching over to another loan type or another lender.
- To reduce the duration of the loan with fewer installments.
- To switch over between a fixed-rate and a floating or adjustable type of interest best refinance rates.
- Extension of a loan repayment schedule with more number of installments and lesser amount.
Based on the needs of the borrower, there are different types of refinances.
- Rate-and-term refinances:
This is the replacement of the original loan with a new loan.
- Cash-out refinances:
When the market value of an asset pledged for a loan increase, one can borrow a loan again on that value when in need of extra money. This is a process of increasing the borrowed amount on the same security.
- Cash-in refinances:
When the value of an asset increase, the borrower can pay down the loan with the same asset for a lower loan-to-value ratio.
The best refinance rates on loan may depend on various factors including the market conditions, individual situation, and the points one may need to pay. The ultimate aim of an individual is to reduce the financial burden associated with a borrowed loan. If he chooses a refinance to reduce this burden, here are a few points that may help him to get the best refinance rates:
- Do not depend on the interest rates until they drop. It’s a common myth that one needs to wait for a drop of minimum by 2 percent in the interest rates. The refinance decision should be based on factors like how long you would like to continue with the pledged asset in future, how much can be saved with the lower interest rate of the new loan, the closing costs and the refinance type.
- Try to get a refinance with the existing lender. It is easier and less expensive as new asset appraisals will not be required for the lender since the borrower’s payment history and the asset is already known to the lender. The lender may also offer the best refinance rates and prices for customer retention.
- Avoid brokers to save up on the ‘finder’s fee.’ Typically 1 percent of the total loan amount is charged for the services offered by a broker. Instead one can do a little bit of independent research to find the existing rates in the market. Also, various online tools will enable to know the best refinance rates, points and annual percentage rates on loans.
- Have a fair idea of the brokerage beforehand in case a broker is hired. The estimates of all the costs involved are supposed to be revealed by a broker as per the ‘Real Estate Settlement Procedures Act.’ But most brokers do not share the brokerage details unless required by the law which should not come as a shocker after the application is submitted.
- Also, knowing one’s credit score, reviewing and correcting any errors on the credit report will help. A credit score of 740 or higher is considered as the best tier to qualify for a conventional loan. With lower scores, one may pay a higher rate.
- Use the loan shopping worksheet offered by the Federal Trade Commission. This can help to compare the all the cost costs that are associated across several loans.
- Do not consider a cash-out refinancing if the loan-to-value on the property is over 80 percent. Go for it only if the property is of high cost and does not require a private mortgage insurance (PMI) on loan.
- Find the right time to lock-in the rate so that any additional costs involved to extend the lock or re-lock the loan can be eliminated. The processing time taken by most lenders is in between 30 to 90 days within which you one can decide to lock-in a good deal.
- Choose the loan term wisely considering the financial obligations for all outstanding debts and plans. Decide the term based on the number of installments and utilization of tax deduction benefits as well.
- Compare all loan options available across multiple lenders: Look out for special programs or promotions offered on loan products available from credit unions, regional or community banks, direct lenders and national banks. Various conventional financing options or government-backed programs like FHA or portfolio loans are available that offer the best refinance rates compared to other loans.