Refinance Case Study 2
The key when carrying out a refinance operation is to know what you want to achieve from it and exactly what it involved. Once you know if your main interest is lower monthly payments, a shorter term, a freeing up of equity or a more organized financial situation you will be in a good position to make it happen. You then need to check the associated fees, whether the term is going to be the same and any other relevant information which could help you reach the right decision about whether to go ahead or not.
If you don’t do it this way there is a risk that your situation ends up the same as it was on the original loan, or it could even get worse after the refinance. Let’s have a look at a refinancing loan which wasn’t well thought out and which didn’t meet the borrower`s expectations or improve their financial situation in any way.
The case we are looking at is of Alan and Mirabelle. They didn’t have a lot of personal loans but ever since they had bought their house a couple of years earlier on some friends of theirs had been telling them they had been conned by the financial advisor into taking out a loan with an excessively high interest rate.
They finally decided to look into a refinancing loan and realized that they could move the loan over onto a different lender for a slightly lower rate. The difference in monthly payments wasn’t going to be great and they were a bit reluctant to go to the hassle of refinancing for the sake of a few dollars each month when they were paying the current figure with no problems.
After a spell of thinking about it they finally decided to change the loan over to a different lender. They didn’t do it so much for the potential saving but mainly because they didn’t want to feel as though they had been conned into paying extra money month after month. They went ahead and got a quote and filed in the online application form. The application was quickly approved and they completed and returned the application form.
Unfortunately, Alan and Mirabelle hadn’t fully looked into the term and conditions of their existing loan, and when the new lender went to pay it off there an exit fee which had to be paid and which completely wiped out the small saving that they were going to make from the switch over of the mortgage.
The important point wasn’t that they had decided to carry out a refinancing loan for the sake of a small saving; this is completely fine. The problem was not taking enough time to find out the full implications of the refinance and the costs involved in it.
Bad refinance decisions don’t always take this form, and other common mistakes than end up proving costly include not checking your credit score before asking for a loan, putting a small loan onto a really long term deal and moving onto a deal that ties you in for far too long.
Refinance case Study 1
Carrying out a good loan refinance takes a bit of investigation and some thought about both the short and long term implications. If this is done correctly then the whole process becomes a lot easier and less stressful. Here we will look at an example of a well planned and well executed refinance which met perfectly the needs and wishes of the borrower; this is the case study of Max and Verity.
Before the refinance loan Max had a credit card up at its limit of $4,000, on which he was paying off the minimum payment each month and which therefore wasn’t reducing month on month. He also had a personal car loan with 3 years still left to run. The couple had a joint mortgage with 20 years left on it and a substantial outstanding sum.
While they were able to pay these debts fairly comfortably with both of them working, things changed drastically when Verity became pregnant and had to give up her job. Not only did this mean an immediate drop in their monthly income, it also meant a lot of expenses on the horizon for the happy couple.
In order to avoid passing an extremely stressful few months before and after the birth, Max and Verity did some thinking and decided that they would like to reduce their outgoings for a few years and free up some extra cash at the same time. The long term plan was for Verity to return to work once the new baby had grown up a little and started going to kindergarten.
They carried out a valuation on their property and realized that there was enough equity in it for them to refinance all their debts and ask for enough extra money to pay the heftiest of the expenses which parenthood was going to bring with it. With this in mind they started looking at online refinance calculators and trying to strike a balance between paying a low sum for the next years and having a reasonable length of term.
Once they were satisfied with the monthly repayments and the length of the term they set about looking at products and trying to decide what kind of loan was right for them. As they were looking for something for a relatively short period of time they choose one which offered an introductory fixed term rate. This meant that the payments would be fixed during the most financially difficult time they were going to have but that they would have the flexibility of refinancing to a different type of loan once this period ran out and Verity was back working again. Their plan was to then reduce the term and go back to pass higher repayments over a shorter period.
As there was enough time before Verity gave up her work to get some extra preparatory work done they decided to live as modestly as possible during these few months, both to reduce their expenditure and to improve their credit rating by not missing payments before they requested the refinancing loan.
Why Refinance?
It is easy to think that refinances are only ever carried out by people who are up to their neck in debt and see this as a way out.
While this is a possibility there are also some other reasons for looking at a refinance deal.
- It is easy to think that refinances are only ever carried out by people who are up to their neck in debt and see this as a way out. While this is a possibility there are also some other reasons for looking at a refinance deal.To free up some equity. Let’s take a look at an example here. You currently have loans for $20,000 and a mortgage for another $140,000. The home is currently worth $300,000. Most lenders will restrict an equity loan to around 80% of the value of the home. This means that the maximum you can borrow is $240,000. If you roll up the existing mortgage and loans then this comes to $160,000, meaning that you still have around $80,000 worth of equity which you could free up with a refinance loan.
- To reduce your ongoing costs. Adding one loan onto another means that you end up paying over different terms and interest rates. If you combine them into one refinance loans this can means lower monthly repayments, although some of the original debt may end up over a longer term, meaning that you pay back more interest.
- To make your outgoings fixed. A popular reason to look at a home loan refinance in particular is to move from a variable rate loan onto a fixed rate one. This means that you know exactly how much you will be paying during the period the rate is fixed.
- To clear your credit card. There are really a couple of different reasons for doing this with a refinance loan. Firstly, if you have a big balance sitting on a credit card the interest can be very high. Moving onto a structured loan or a new credit card with a special introductory rate can help avoid this. However, there is another reason for clearing the balance off your credit card. If you have it as an emergency backup and it is up to the limit following the last emergency then what are you going to do the next time instant cash is urgently needed? If you can get the card balance down to zero again then it can be used the way you intended it to be.
Refinance Strategies
The refinance strategies which you consider best for your purposes really depends upon your reason for wanting to refinance and what you hope to get out of it.
Here we will look at some of the main types of situation:
To start working your way out of a bad credit position.If your credit has been damaged by some unpaid bills or other financial problems then your first step when looking at a refinance is to see what can be done to improve your credit rating before you apply for the loan. If you can make an improvement before the loan application is made then this can mean getting a better deal on the refinance. Even if you can’t get an improvement done in time you should still look think about your short and long term objectives with the refinance. If you are currently struggling to pay big monthly repayments you may be better off looking at spreading out the loan over a longer period in order to have less needing paid each month.
To reduce the loan term. The refinance strategies for this situation are often completely the opposite from in the previous example. You may be considering this type of refinance because you plan to ask for a big loan, such as a home loan, in the next year or two and want to clear up any existing debts before this. You may also simply want to get rid of loans and credit cards which have been hanging around too long. In either case, you should be sure to choose a monthly repayment amount which is realistic even if things become more financially difficult for you at some point. If you really want to pay everything off as quickly as possible then you should make sure that you can pay off lump sums on the new loan without any sort of penalty.
To move onto a lower interest rate. If rates have gone down since you took out the original loan or if you were sold a bad loan then you might like to refinance onto a better rate. The thing to look out for here is the overall cost of the refinance to you. Even if the rate being offered is lower than the current loan you should still check opening and closing fees to make sure that you are definitely gaining overall.
To better organize your finances. Sometimes a refinance strategy doesn’t really give you much of a financial benefit but does help you organize your monthly outgoings in one big loan payment instead of several small ones. As well as making sure that you aren’t going to end up paying more money back overall you should also take the time to consider the ideal payment date. You may be surprised to learn how many people miss payments purely because the loan payment date isn’t ideal. You should try and make it a few days after your salary gets paid in and then make sure that you always have the full amount sitting in your account on this date.