Cutting Down Borrowing Costs With Proper Refinancing

By: Lesley Lyon

The replacement of an existing debt by a new one with different terms is called refinancing.

Refinancing can be done for various reasons. Refinancing can be undertaken for the purpose of reducing interest cost by refinancing at a lower rate, to extend the time of repayment, to pay off other debts, to reduce a person's periodic payment obligations by taking a long term loan, to reduce or change the risk, to raise cash for investment, consumption or for the payment of a dividend.

Refinancing can alter the monthly payments by changing the rate of interest or by changing the term of the loan. Overall borrowing costs may also be reduced. Another advantage of refinancing is to reduce the risk of an existing loan. Interest rates on adjustable -rate loans and mortgages move up and down based on the stock market indices. By refinancing an adjustable rate mortgage into a fixed rate, the risk is eliminated, that is, the rate does not vary thus ensuring a steady rate of interest throughout the term of the loan.

There are two types of refinancing, No-closing cost and cash-out. In no closing cost, borrowers pay few upfront fees to get the new mortgage loan. This is particularly beneficial when the prevailing market rate is lower than the existing rate by 1.5 %points or more. Cash out refinancing can be used for home improvement, credit card and other debt consolidation. They can refinance with a loan amount more than their current mortgage and keep the cash difference.

In refinancing there are different kinds like Home mortgage refinancing, car purchase loans, Student debt consolidation etc.

Home owners choose to refinance for several reasons some of them being to obtain a lower interest rate, build equity faster, change the type of loan, take advantage of an improved credit rating and draw an equity already built in the home. A lower mortgage interest rate can lower the monthly payment and is the most popular reason for refinancing and equity faster because owning a home is one of the safest and most profitable investments.

Mortgage refinancing is offered by banks to the customers to fully satisfy their needs for finance. Home mortgage refinance loan is a good alternative to bankruptcy and foreclosure and a better option to regain some ground in financial solution. The home mortgage refinance loan is a complete and total replacement of the existing mortgage.

Reverse mortgage helps the homeowner to convert the full or part ownership into approximate cash amount or as monthly cash advances on a regular basis. This is also known as "credit line"

There are different types of refinance mortgage viz. fixed rate mortgage, balloon home loan, and home equity loans. For refinancing a lender will have to complete loan applications that assess the financial situation, credit history, the property value and the amount of equity.

There are many benefits of refinancing-lower monthly payments, debt consolidation, using the existing equity in the home etc- are some of them. However when the homeowner does not stay in the property to recoup the closing costs or when the homeowner has had a lower credit score, refinancing can be a mistake.

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