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  • Should I Refinance or Continue Paying The Main Principal?

    August 20, 2017 | Blog Financing
  • should I refinance

    Refinancing a credit, credit card, or bank account requires a new loan to be substituted for the old one. So, the question "Should I refinance?" normally comes to mind. First of all, obtaining more favorable credit conditions, with lower costs and implicitly a lower monthly rate and/or getting an extra amount of money.

    The procedure to follow is simple: the owner of one or more credits (of the same type or different) obtains a new loan, more advantageously, from another bank or even from its bank, money that will be used for the advance payment of the old credit.
    Since it is a new loan, its conditions may differ from the old one in all respects (its value, the currency, the type of interest, the lending period). Under these conditions, the beneficiary could even get an extra amount of money, not just the one needed to repay the old credit.

    Careful! As this is a new loan, you will have to bear the costs associated with granting it, which differs from bank to bank, the most important being the commission for granting, valuing guarantees and notary fees, insurance. Some banks may, in the promotions, remove certain commissions, such as the grant.

    You might ask how it is possible to refinance a credit in better conditions at the same bank, in other words, why would the credit institution be willing to accept lower interest rates.

    On the other hand, a bank may be willing to accept conditions less advantageous than before, that is, a lower interest than previously, in order to retain its client, especially if it is a loyal one and uses more Many financial products. All the more so since lately, as a result of increased competition, credit costs have dropped considerably, even more than before the crisis broke out.

    Still asking yourself the question "Should I refinance?". Let's look at the reasons for refinancing, what we need to be careful about, giving you a concrete example of the benefits of refinancing.

    Reasons to call for refinancing

    1. Reducing total credit cost

    It is achieved by obtaining an annual effective interest rate (DAE) lower than the one paid so far or by changing the type of credit. Thus, a personal needs loan without guarantees for a period of 5 or 10 years can be converted into one with a mortgage, with lower interest.

    How much do we earn from the interest rate cut?
    For example, if a 50,000 USD mortgage loan with a DAE of 9.7% is replaced by another with a DAE of 7.29%, the 30-year monthly rate will decrease from 420 to 350 euro. In total, savings reach almost 28,000 USD.
    Careful! Make sure the DAE is calculated for the entire credit period, not just during a certain promotion, a few months or a year.

    2. Bring multiple loans of different types into one, for debt reduction

    For example, two personal needs loans can be reunited in one, by calling for a new credit to repay the other two in advance. In this way, costs will be lower, as fewer commissions will be paid and less interest can be earned.

    3. Getting an extra money by extending the period during which the credit can be repaid and/or reducing costs

    Should I refinance? For example, if there are still seven repayments from the 10-year credit, the credit can be extended for 10 years again, and therefore an additional amount of three years may be obtained. Also, a 5-year credit can be converted into one for 7 or 10 years, and the amount of credit can also be increased. Careful! The longer the credit period, the higher the total credit cost.

    What we need to be careful when asking "Should I refinance?"

    1. Annual Effective Interest Rate (DAE) to be lower than the one paid on your old or old credit and to be valid for the entire lending period, not just during the promotion.

    2. The amount of the guarantee (the mortgage, in the case of a real estate credit) has not so low that it does not cover the amount of the loan. You may still be asking yourself "Should I refinance?". Well, it's good to know that banks typically require that the mortgage amount represents around 130% of the loan. If the value of the mortgage is lower, you can call for an additional guarantee.

    3. Revenue should be at least the same as when the old credit is contracted, especially if it is desired to reduce the cost of the loan or to obtain an additional amount. Now the banks are more restrictive on the value of the loans granted, so that on average the debt ratio is around 40-50% of the revenues, compared to 60-70% before the crisis. If you do not fit your income, you can call a co-debtor or debtor if the bank accepts it.

    4. Should I refinance? The costs of refinancing (the new loan) may be quite high in the case of some banks. The most important commissions are those of early repayment of the old loan (0.5% or maximum 1%, depending on seniority, perceived only if the interest is fixed, this commission being banned now if it is a variable interest rate), The commission for the granting of the new loan and other taxes, such as the registration in the electronic archive or the assessment of the immovable property brought under the guarantee, the notary fees, the insurance.

    5. The currency in which the new loan is made is important, especially if it is a euro or another foreign currency, as this is the currency risk. Make sure to have this in mind when asking "Should I refinance?". This is reflected in the depreciation of the USD against the foreign currency. For example, from previous years' experience, we have seen that the USD against the euro can fall by 15% or even more for other currencies, which means that the monthly rate we will have to pay will increase proportionally.

    6. The total cost of the credit is important to be calculated both at the time of the grant and at the end. The total cost is the annual effective interest rate (DAE), which includes not only interest but also all related commissions. This helps us compare several bids of the same type, of the same amount and repaid over the same period. It's good to know that the monthly rate will be the lower, the longer the repayment period. But you also have to think about the fact that, on the other hand, the more we redeem a credit for a longer period, the more we pay for it at the end.

    7. Payment history, or customer score, is becoming increasingly important for banks, especially refinancing. For example, those who have not had delays in paying rates will benefit from better borrowing conditions, while those who have been variously delayed or even enrolled in the Credit Bureau database may have problems In approving new funding. But it is good to know that banks are not banned from lending and those who are enrolled in the Credit Bureau, the decision being taken according to their credit risk policies. In other words, a bank may refuse to give you credit, while another may accept you. One might ask for a higher interest, while you could find better conditions.

    Keep all of the above things in mind when asking yourself the question "Should I refinance?" and you will be one step closer to financial success.