Have you recently decided to refinance? In essence, refinancing means restructuring loans for gaining better control over your finances and more financial stability in everyday life.
Preparing for refinancing involves determining the best time for making such a commitment, assessing your home value, knowing your credit, and gathering all the necessary documents. If your credit is unsatisfying, you should make improvements on time to appear less risky to lenders. The documents you need include pay stubs, an asset statement, an outstanding debt statement, profit and loss statements from the self-employed, etc.
The following pieces of advice break down the preparation process.
Decide whether the time is right?
The initial thing to do when preparing to refinance is to decide whether the time is right. You should compare your momentary interest with market interest rates. Even if the market rate is lower, it doesn’t necessarily mean that refinancing is the best action to take. Refinancing costs can run into thousands, which makes the decision not worth the time and money.
Borrowers should be aware that these fees vary across lenders, and some might not even apply with certain lenders. Shopping around is warmly recommended for individuals to find the best offer. Once you have made all evaluations, you should determine whether and when a refinance will save you money.
There are numerous online calculators that can help you calculate the break-even date. You need to use information like your monthly mortgage statement, the new interest, your income tax rate, and all the fees. The calculator will inform you how long it will take to make savings from your new loan. Find out more about the meaning of an equated monthly installment. Another method of calculating your refinance savings is by lowering your loan’s life. You need to multiply the monthly installment of your current loan by the remaining number of payments to get the total cost of your current mortgage. Repeat the process for your refinance and calculate the difference between both sums, which represents your savings.
Determine your home value
The following action to take is to determine the value of your house/apartment. The loan-to-value ratio is among the most important factors determining if a moneylender will refinance. The higher the refinance loan is in relation to the home value, the greater the risk of lending. An unwritten rule is lenders want the worth of loans to be no higher than eighty percent of the home’s value.
Prior to paying for a written appraisal by a licensed inspector, you should check the sale prices of similar homes in your local area and property tax assessments. After choosing a lender, you should request them to order an appraisal of your house. If the value doesn’t meet the eighty percent mark, you should decide whether going forward is worth it. You shouldn’t order an appraisal prior to selecting a lender, as most moneylenders won’t accept the appraisal you ordered.
Know your Credits
A credit score represents the creditworthiness of a person and assists banks in determining the risk of lending money. Norwegian banks are obliged by the new regulation of the Norwegian Ministry of Finance to obtain the necessary information about one’s financial situation by looking at this score before processing the loan application. This article, https://www.foxbusiness.com/money/5-factors-affect-credit-score, explains the five factors affecting one’s credit score.
The Norwegian credit score ranges from 1 to 100 points. Consequently, 1-20 means that the lending risk is very high, while 71-100 indicates the lending risk is very low. Banks compensate for the high risk of lending money to a person with a low score by boosting interest rates. This score in Norway is based on income, debt, tax, assets, and demographics.
The Norwegian credit score system relies on stable parameters, such as age and income. Therefore, there aren’t too many tricks that a person can perform to improve his/her score overnight. A recommended method for improving it is by avoiding payment remarks, which are received when bills keep on going unpaid.
Increasing your personal assets is another method for making score improvements. An increase in personal assets indicates financial control. Low and fluctuating income has an adverse effect on this score. Only by securing a high income, there is room for score improvements. Reducing your debt is another way to reach a score improvement. Getting rid of expensive debt should be on the top of your list. Moreover, moving frequently is bound to have a negative score effect as well. According to many, refinansiering seems to be the best solution for getting out of debt and feeling less stressed about finances. Additionally, living in an area where loan defaults are considered common can lead to lower scores. As already mentioned, age has an influence on these calculations. Generally, young individuals will have lower scores, along with those older than seventy.
Gather all the documents you’ll need
If choosing to refinance, you should provide all the necessary documents to provide to the lenders. Start by getting copies of your latest pay stubs, which prove your ability to repay the loan. Self-employed individuals need to provide profit and loss statements for the previous year. Tax statements for the last two years should be provided too, as these are proof of one’s employment history and income security.
Furthermore, some lenders will require you to submit a statement of assets, which is contrary to a debt statement. It offers information on the assets you own, such as property titles, savings and checking accounts, stocks and bonds, etc. While this information might not be required as a separate statement, you will be requested to provide it during the application procedure.
If requested, you should create a statement of outstanding debt, which encloses all your debt obligations. Lenders will be able to access most of it through your credit report, but they still might need the official documentation from creditors. Debt statements include mortgage debt documentation, a student loan statement, a copy of your monthly car note, credit cards, home equity credit lines, etc.
Consider multiple lenders
While all moneylenders might seem the same, shopping around can lead you to the best deal. You can work directly with moneylenders or a broker. You should look for differences in fees and points paid. The differences between lenders can be significant even if the interest is similar or the same.
To sum up
Do not refinance unless you are prepared to do so. The process might be lengthy, but it’s highly necessary. Spend enough time on preparation so as to save on costs and wasted time along the way.