Refinancing a loan is a way to bring monthly payments down and potentially save borrowers thousands of dollars over its term; but what’s to stop them from getting lower rates in the first place? Two people refinancing the same amount under the same loan can get three percentage points apart in their offering – and that difference translates to thousands of dollars over the life of the loan. But why? Because lenders have a price assessment risk in mind before offering terms, and understanding what factors put someone in a place for competitive terms earns them a much more likely chance of getting refinancing worth it.
Credit Score Changes Mean the Most
Credit score is akin to report cards sent to institutions upon whom lenders rely for determining refinancing rates. Scored 1-850, these three-digit numbers are essentially the make-up of payment history, debt amount, debt age and recent activity that gives a snapshot of likelihood to repay. The higher the score, the better the interest rate since it’s less risky for lenders.
Credit score ranges fall into tiers that create great pricing divergences. For example, over 750 is excellent and while these borrowers receive absolute lowest rates available, those between 700-749 (good credit) still reap fair options, while the next group (fair credit, 650-699) pay exorbitant rates. Below 650 they’re still approved, just given terrible terms with higher rates. However, across the board above 700 refinancing probably won’t be worth it.
Even a point or two can help shift someone from tier to tier. For example, starting at 695 versus 720 could drop the offered interest one percentage point or more. Over a 400,000 kr refinance that’s thousands of dollars in interest charges per year. Therefore it’s worth it to increase scores before applying as it pays for itself.
Increasing credit scores takes time but becomes predictable with expected results. Most importantly it’s payment history – which means setting accounts on autopay will ensure even if someone forgets a payment time a negative hit only happens with one past-due payment. Credit utilization (amount of credit used versus how much is available) should be less than 30% – preferably under 10% – therefore, paying those debts down becomes noticeable quickly with credit score improvements within a month from billing.
Pay Debt Down Before Applying
Debt-to-income ratio is one of the most important factors determined for qualifications and rates for refinancing. This ratio is created by taking total monthly payments and dividing them by gross monthly income. The lower the percentage, the less likely someone is going to get in over their heads with monthly debt payments. While most lenders favor 40% or lower (this includes all debts – housing, auto and credit), others will entertain higher amounts with compensating factors.
However, debt relief pre-refinancing shores up much better chances. For example if someone pays 3,000 kr on their car loan monthly getting rid of that debt or decreasing their credit minimum payments each month by 2,000 kr helps lenders consider monthly payments more affordable to borrowers than someone who has no debt relief options. Debt relief also usually increases credit score due to higher utilization but more importantly debt relief works better.
Debtors should first focus on high-interest revolving credit. Credit card interest rates of 18%-22% should be prioritized on cards that have balances. Paying off smaller balances more quickly does more good than spreading payments on other lines, since each payment eliminated gives a borrower less debt-to-income ratio.
Income Stability and Documentation
Lenders want assurance that income will support payments throughout the refinancing term, therefore how much someone makes becomes important but how stable employment history proves that figure is even more critical. For example, someone who has worked somewhere for six months with a salary of 500,000 kr looks riskier than someone who has been at their job for five years making 400,000 kr annually.
Proving stability also means being prepared with documentation helps deter unnecessary paperwork setbacks when terms might change favorably in the interim. The best documents include paystubs for three months (current employer), tax returns for two years (stability proven over time), employment letter from HR potentially even employment verification.
Self-employed borrowers need two years of tax returns plus bank statements proving consistent entries from business income.
Timing makes sense based on employment stability as well – waiting three months to apply post-entry shows intent at staying in one place; applying before one plans to leave shows intention to refinance under current employ.
Shop Multiple Lenders!
No two lenders offer the same rates based upon their own assessments – their financial bottom line needs versus any competitive edge they need to throw in. One lender may give 5.5% where another flat out offers 6% with no competitive extras; therefore shopping is suggested.
Since there’s coverage within the system to shop multiple lenders for different rates for different institutions it makes sense to contact multiple lenders at one time before getting sanctioned for too many inquiries on a credit score. In general, if potential borrowers apply to multiple lenders within 14-45 days (depending upon which credit agencies) they’ll only be considered one inquiry on their report at worst, allowing room for assessment before applying.
Therefore it makes sense for borrowers who position themselves well to do their research looking for what lenders have the beste refinansiering options available.
Preliminary qualified offers also help as many lenders quote soft pulls not impacting credit scores; this means applicants can get narrowed down before applying for hard pulls.
Collateral Loan/Value Issues
Secured refinancing – mortgages and auto loans – come with lower interest rates than unsecured loans/personal loans/credit cards as collateralized items help lender risk – they can take back items if stops making payments; however when secured loans come into play based on loan-to-value ratios – how much someone wants compared to how much it’s worth – it could qualify terms competitively.
Lower LTV percentages qualify better – a borrower refinancing at 60% LTV (240,000 kr loan on property currently valued at 400,000 kr) gets better terms than someone at 85% LTV (340,000 kr loan on property valued at 400,000 kr) – the first borrower has equity cushion from portion ownership; therefore if value ever dropped due to foreclosure or market considerations lenders see it’s not in their best interest.
It’s better to build equity before applying for refinancing better positioning for more favorable rates – even if it means putting more principal payments down it reduces what needs refinancing in general but also selling/prepping for added value isn’t always feasible as appraisal values might outweigh use.
Relationship Banking and Loyalty Programs
At times existing customers get preference through competitive refinancing from current lenders; existing lenders with checking accounts/savings accounts/custodial investments don’t want beneficial long-term customers getting sullied elsewhere but instead lock them down through relationship pricing.
Typically price reductions go from .25%-1 percentage point lower than normal rates; without any other compensating factor new customer acquisitions paint a picture better than anything that would apply elsewhere; relationships go both ways – to keep loyal customers happy and prevent churn.
It doesn’t seem like a lot; but when borrowers get a loan exceeding 500,000 kr spread out over ten years it equals thousands saved – not including closing costs avoided because loyalty relations simply inquiring about any retention discounts keep money from unnecessary shuffling.
New customer acquisition efforts work opposite direction – banks/lenders want new market share acquisitions and aggressively offer low rates as catch-all options regardless of limitations brought in by any transparency-based strategies mixed into relationship programs seeking new clients lend lower . . . sometimes even lower than loyalty programs themselves’.
Confirming what’s out there through loyalty through existing providers compared to lender acquisition strategies gets borrowed money with good terms.
Market conditions dictate when borrowing should happen – if interest rates drop based upon overall economic trends/how central banks determine best pricing opportunity then it’s better to wait; if it’s climbing then borrow now as pricing will never be this low again.
Putting it All Together
Not getting lucky is how borrowers qualify for lower refinancing rates – getting everything in order before applying ensures money comes back in savings instead of compounding losses over time with poor terms. Credit score increases and quantifiable factors reduce debt-to-income ratio which are assessed through diligent research and application determined comfort levels which translates into lower pricing offers.
The difference between mediocre offers and competitive ones easily range from 2-3 percentage points – and when loan amounts over time accrue from hundreds of thousands of dollars means tens of thousands of differences. If borrowers could take two months longer to strengthen their conditions before applying instead of jumping into mediocre qualifications immediately offered money can compound quickly.
