It allows the borrower to save money for lower interest rate and term you can afford.
The prefix –RE which means again, we could take out the description of Refinancing. In the technicality of the term, it is describes as saving money for your financial flexibility and having a longer term to be able to pay it. It is an option for replacement of an existing debt obligation with another debt obligation in different time.
In case of occurrence in financial distress, there will be a debt restructuring. There are reasons to refinance: First, taking advantage of interest rate. Second, consolidating other debts into one loan. Third, reducing monthly payment account. Fourth, alter risking. Lastly, freeing up some cash.
POSSIBLE RISKS IN REFINANCING
If there are good points in taking refinancing, there are also risks in getting this. Other fixed-term loan has penalty clauses triggered by early repayment of loan including closing fees. There are also other transaction fees in refinancing that the fees should be calculated before boarding on loan refinancing. Prior to maturity penalty clauses are only applicable to paying off loans. But if a loan is paid off upon maturity, it is considered to be a new financing not as refinancing. When the new refinancing funds pay off the prior debt, the entire prior obligation will be terminated.
The refinanced loan could happen to have the same interest rate way back, but with longer term it will then have the output of larger interest cost over the trail of loan then the borrower’s remaining borrower’s debt will be the result. Since a refinanced loan need to have lower interest rate, the longer term remaining on the loan with decreased payment will be combined, this results the lower rate.
Moreover, the existing loan should be calculated with the total cost by the borrower. It will now include the closing cost, prepayment penalties and the paid interest will be the new life of new loan to see its potentiality for refinance.
MAJOR POINTS OF REFINANCING
The lender often requires percentage of the total amount as an upfront payment. The amount is expressed in points 1% of the total loan amount distinctively. Other points usually result in lower interest rate in which the lenders offers the finance parts of the loan resulting to negative points.
Refinance is divided into two major types:
Rate and Term Refinancing is used to save money, that when you refinance the remaining balance to get lower interest rate and your affordable term. (Term is used to modify the years it will take to repay the loan.)
Cash out refinancing. You take out the mortgage more than you owed then you take cash in difference or just use to pay the existing debt. This has also its advantage and disadvantage. For an instance, you use cash out refinance to pay your debt in a credit card, on the good side you are decreasing the interest rate on the credit card. Otherwise, you will pay thousands more in the interest due to longer term to pay off the balance that you transferred from your credit card to mortgage.
Few notes that you need to keep
Again, refinancing is done to allow the borrower to get better interest term and rate. When the first loan is paid off, you are allowing the second loan to be created, aside from creating a new mortgage and throwing out the old one. There are borrowers who have perfect credit history, this is one suggested good way to convert a variable loan rate to a fixed one to obtain lower interest rate. On the other hand, for those borrowers who have been not-so-perfect or the term, having a bad credit, taking this would be of entering a huge risk.
No one tell that paying bills would be fluid. It will be tough to make payments in a mortgage. You are gambling between possible high interest rates and an unstable economy. It will be seen as tougher than what we could expect. But at least, try to hear your inner speech and your capability of engaging into refinancing. Without enough knowledge, your interest will be lowered and you are risking to nothing. Always seek information for the knowledgeable in this field to help you out in your dealings. This is a witty financial move to reduce payment, decrease the term of loan and helps in building equity easily.
Cashing out is not a having a magical wand to produce several dollar rolls, but being careful with the ideas for deciding whether to take refinancing or not. Be careful.
