Debt burden refinancing
The New Year is often a time of reflection and renewal. We want to lose weight, quit bad habits or find a new job. For brokers it provides a great opportunity to offer customers options to reduce their cost of debt through refinancing. There are two major reasons to refinance:
1. Customer qualifies for better interest rates
Is your customer’s mortgage currently with a private lender? Have you checked to see if they qualify for less-onerous terms with an alternative lender? Any of the following situations may warrant an application for refinancing:
- LTV is now below the alt lender’s threshold: your customer’s regular mortgage payments and/or increased property value may have reduced their LTV below the 80%, 75% or 65% maximums that necessitated private lending to begin with
- Employment situation has change: If your BFS customer has been in business for two years now, or if they switched to a salary/wage earner, refinancing with an alt lender may be possible
- Extend the loan term: Alt lenders often offer terms up to 30 years. If your customer couldn’t qualify for an alternative mortgage because their GDS/TDS ratios were too high, extending their mortgage term may reduce the ratios to be within the guidelines of an alt lender
Keep in mind that refinancing involves prepayment charges, which should be factored into the calculations of how much it might save. Depending on the terms of the original mortgage, these could significantly reduce the amount saved by refinancing at a lower interest rate. Also, extending the term of any loan will increase the total amount of interest paid over the loan’s life.
2. Debt Consolidation
The post-holiday blues are often associated with debt. Many of us get carried away with gift-giving and sunny vacations. This is a good time to inform your customers that refinancing to consolidate their high-interest debt can save thousands in interest savings with a simple, single monthly payment. Some debt-consolidation considerations:
- The monthly payment should be less than the sum of the monthly payments on the individual loans
- The interest rate on the refi should be lower than the average of the interest rates on the individual loans
- If the term of the refinance is longer than the terms of the original loans, your customer may end up paying more interest in the long run, even if the rate is lower
In either case, if the savings from refinancing outweighs the costs, it’s an easy sell to your customer and is also a process that can be repeated if/when your customer progresses to prime borrower status.
What do you think? We’d like to hear from you in the comments section.