How to understand when it is time to refinance a loan

2024 Author: Malcolm Clapton | [email protected]. Last modified: 2023-12-17 03:44

An instruction to help you combine several loans into one and pay less.

The loan can be made less onerous by reducing the interest rate and the monthly payment amount. This opportunity appeared because the Central Bank is lowering the key rate - the one at which it lends to commercial banks. The lower the bank rate, the lower the rate for you. Therefore, mortgages and consumer loans are becoming cheaper. In December 2014, the key rate reached 17%, and on February 9, 2018 it dropped to 7.5%.

If you took out a loan just at the moment when the rates were maximum, then now you can refinance it.

What is loan refinancing

Refinancing is getting a new loan to pay off the existing one. At the same time, a new loan is issued on more favorable terms (the rate is reduced). Due to this, you can:

1. Reduce the monthly payment (while maintaining the loan term).
2. Reduce the loan term (while maintaining the credit load).
3. Receive additional funds to the existing loan (monthly payment will not increase).

Refinancing and restructuring should not be confused - revising the terms of an existing loan. Refinancing is needed in order to save money, restructuring is needed to reduce the loan burden if you cannot repay the debt. In the first case, you can contact any bank, in the second - only to the one where you took the loan.

You can refinance several loans at once. For example, you have a mortgage, car loan, and credit card debt. They are combined into one, make a common payment and one bet. Now you pay only once for one loan instead of several payments to different banks. Some banks refinance up to three loans, some up to five. It all depends on the conditions.

You can refinance a loan at the same bank where you took it, but there is a possibility that you will be refused. There is no need for the bank to reduce interest on the loan and lose profits. In this case, refinance the loan with another bank. Choose the one where you are offered the best conditions.

It works like this. You leave an application for refinancing. It is approved, and the new bank transfers the amount of your debt to the old bank from which you originally took out the loan. You write an application for early repayment in the previous bank, receive a certificate of closing the loan and give it to the new bank. After that, pay the loan as usual, only to another credit institution.

What loans are refinanced

You can refinance any loan: consumer, car loan, mortgage, credit card, debit card with overdraft. But not all banks offer such a choice, some work only with consumer and car loans.

There are limits on the amount, but each bank has its own conditions. Not all banks refinance foreign currency loans.

Banks refinance only those loans for which the applicant regularly pays. The service may be refused if you have been late with payments in the last 6-12 months.

The bank does not want to contact unreliable customers who will delay payments or not pay at all. Therefore, you must have a good credit history.

Another requirement: the loan must not be new (you took it at least six months ago) and must not expire in the next 3–6 months.

When you need to refinance a loan

1. If you have several loans

The refinancing procedure will make one loan from several loans with a single payment and a single interest rate.

2. If you took out a mortgage at a high interest rate

Previously, the average mortgage rate was 12-15% per annum, in October 2017 it dropped to 9.95%. In this case, refinancing is profitable, because paying for a long time and reducing the rate even by 1.5% will allow you to save.

3. If you have a foreign exchange mortgage or foreign exchange loan

Due to the growth of the dollar and euro, foreign currency loans instead of profitable ones have become burdensome. With the help of refinancing, you can lower the interest rate, reduce the amount of the monthly payment, or make the loan in rubles.

4. If you need free funds to your existing loan

When refinancing a loan, you can additionally ask the bank for a certain amount. As a rule, it is 50-100 thousand rubles. It is assumed that due to the decrease in the rate, the monthly payment will not increase, although the loan term may increase.

5. If you want to reduce the monthly payment, but are ready to repay the loan longer

This is not the best measure: with an increase in the loan term, you will pay more interest to the bank, which means you will overpay. But if you understand that it is difficult for you to repay the loan, you can refinance it: the interest rate will be lower, the monthly payment will decrease, and the repayment period will increase.

What you need to pay attention to

If you have repaid most of the loan, then refinancing it is not worth it. Even if your loan rate decreases, most likely you will not benefit.

This is because the interest on the loan is paid first, and only then the principal amount. If you refinance a loan, you will pay interest again, instead of repaying the main debt.

If you took out a loan for five years and you have 1, 5–2 years left to pay, you should not refinance it.

When refinancing a mortgage in a new bank, additional costs appear: for real estate appraisal, for certificates from the BTI and the house book, for notary fees.

Additional expenses will arise in case of reinsurance. If you refinance a mortgage or car loan with another bank, you will need to take out new insurance or renew the old one (if your insurance company has accreditation with the new bank). The amount of insurance can increase by several thousand per month, which means that the benefits from refinancing will decrease or disappear altogether.

Before using refinancing, calculate loan payments at a new interest rate, taking into account additional costs.

If you refinance a loan at the same bank that issued it, the costs will be lower. Therefore, if your bank refuses to lend you, get approval from another credit institution. With this decision, go to your bank again and ask again to refinance the loan. This will show the seriousness of your intentions, and the service may be approved. Otherwise, the bank will lose the client, and this is unprofitable for him.

Also keep in mind that refinancing may increase the loan term. The bigger it is, the worse it is for you. In seven years, you will pay more interest than in five, even if the rate on the first loan is lower.

If you refinance a loan, it is better to keep monthly payments at the same level: this way you will shorten the loan term and pay the bank less interest, as well as get rid of the loan faster.

Before applying for refinancing, clarify the details: is there a refinancing fee, for transferring funds from a new bank to an old bank, a penalty for early repayment of a loan in an old bank.

For example, if you apply for refinancing to close five loans from different banks, then you may be charged a commission for transferring money five times or fined five times for early repayment.

How to calculate if refinancing a loan is profitable

You will receive the exact numbers only at the bank branch by submitting an application for refinancing. Approximate data can be obtained using online calculators.

Let's say you took 500,000 rubles for three years at 24% per annum, the calculation scheme is annuity (the same amount of payments every month). In three years, you would give the bank 706,191 rubles.

After a year of payments, you decided to refinance this loan (12 payments have already been transferred, for the year you gave the bank 235,392 rubles, the remaining debt is 371,024 rubles). For this amount, you need to calculate the refinancing.

Bank X offers you refinancing at 19% per annum for two years. We enter this data into the calculator. The monthly payment will decrease from 19 616 rubles to 18 651 rubles. In two years, you will pay 447,629 rubles on the new loan.

Before that, you have already paid the former bank 235,392 rubles. It turns out that in total you will give 683,021 rubles. If they paid on the old loan, they would have given 706,191 rubles. The total benefit will be 21,170 rubles.

This is a benefit without considering possible commissions and additional costs. You need to find out about them at the bank.

What documents will be needed

To refinance a loan in a new bank, you need to collect a standard package of documents:

1. Passport.
2. The second identity document (TIN, SNILS, international passport, driver's license, debit or credit card of any bank, OMC policy).
3. Certificate of income 2-NDFL.
4. Loan agreement.
5. Statement.

The bank may require additional certificates to confirm the information.

Outcomes

Refinancing is a good banking service. With its help, you can save money and pay the bank less, but it is important to use it correctly.

1. It is profitable to refinance a mortgage if the rate is at least 1.5% lower.
2. Refinance only those loans for which most of the interest has not yet been paid.
3. Try not to increase the loan term: you will pay less per month, but in the end you will give more to the bank.
4. Be sure to calculate loan refinancing taking into account additional costs and commissions.