Securing a loan can be expensive sometimes. If you don’t have a good credit score, you might end up with a high-interest loan with bad terms. When your credit score or financial situation improves, you might want to get a better loan with low interest and terms. This is what refinancing means.
Refinancing is when you take up a new credit to pay off an existing one. The new one you take should have better terms and lower interest than the older one. If you were struggling to repay your debt, refinancing can help you out.
Before you decide to refinance, it is vital to calculate the value of doing so and whether your old credit is worth taking a new one for. There is a tool you can use for this. It is known as a refinancing calculator.
To assist you in knowing what this calculator is, let’s discuss how to use this calculator and some important steps to follow when refinancing after using the calculator.
What is a Refinancing Calculator?
This is an online tool that you can use to deduce what your new monthly payments on the new credit you take would be. This tool will assist you in making accurate predictions on what to expect even before you choose a lender for refinancing.
How to Use it
To understand and use this tool, you can compare your current loan monthly payment to the proposed monthly payment on the new credit. Afterwards, use an amortization schedule to contrast the principal balance on the new loan after making similar payments like you have currently done on the existing credit. Both the principal balance and monthly payment of the new credit must be lower.
A lower amount shows that refinancing is the best option for you to take. Now, let’s discuss in detail some of the terms that determine whether you should refinance or not:
Monthly Payment
You can use the calculator to determine if your current monthly payment is higher than the new loan you wish to take. You can do so by dividing each loan monthly payment by 12 and comparing and contrasting them. If the new credit has a lower monthly payment, then it is a good deal.
Amortization
Amortization means that your loan amount remains the same every month, but the rate of interest and the principal amount vary with each monthly payment. Amortization makes sure you pay more for interest than principal during your credit term. Refinancing helps to restart your amortization schedule with the new credit, by reducing the principal amount you are paying every month. If you would like to know more about amortization, read this article.
Steps to Take When Refinancing after Using a Calculator
Now, you know that it wise to take up a new loan to pay off the existing one. But what steps should you take? The following are some steps to take:
Know How Much Money You Owe
Before you get the new credit, you need to know how much debt you have on your current loan. Determine the exact amount you need to borrow. Ask your current lender if you will be charged for paying off your debt early through refinancing.
Knowing how much you need is vital because to refinance a loan means to pay off an existing debt with a new credit.
Make Sure You Have a Good Credit Score
The main reason why your former loan came with high-interest rates may be because of your poor credit score. Therefore if you are considering refinancing, you need to make sure that you improve your score. Request for the score report from the right organization, and then see if it needs any improvement or has improved enough to take a loan with better terms and interest.
If it has not improved, then do all you can to increase the score. One important way to do this is by making your monthly payments on time.
Compare and Contrast Offers from Different Lenders
After improving your credit score, the next thing to do is to look for a lender with better offers. You can call your current lender to talk about your refinancing plans. If you don’t trust your current lender, go elsewhere for a better loan.
Make sure you carry out research on different lenders available, whether online or in person. You can keep these questions in mind as you research:
- Is the lender of good reputation?
- How long has the organization been in the business?
- Does it have current legal disputes with former customers?
- What are its loan offers and application process like?
Aside from this, some lenders might offer free consultation services to you. They will assist you in calculating whether refinancing is the best option for you and the best loan you should take. You can check out this review on refinansiering kalkulator by inferse.com for more information on what this involves.
Check out the New Credit and Ask Important Questions
When you choose a lender, it is important you do not rush into signing an agreement with the firm. You need to read through the loan agreement’s fine print before doing anything. Ask the lender questions like:
- Would I pay an application fee?
- What are the terms for repayment?
- Are there prepayment penalties?
- Is there any limit on what the borrowed funds are used for?
The answers you receive from the lender will determine whether you should sign the agreement document or not.
Close Your Current Debt
After approving your new credit for refinancing, the next and last thing to do is to close your current debt. Failing to do so promptly will lead to disastrous situations. You might end up with two different loan debts to pay off, instead of taking the new one to pay off the current debt.
If you chose a different lender for refinancing, make sure you inform your former financial provider on time. A little delay might cause financial troubles.
Conclusion
In summary, the decision to refinance your existing credit is important as it helps save you from high-interest rates. However, before doing so, it is important you use a refinancing calculator to determine whether it is worth it or not. Then you can follow the steps above.
