What is Refinance and Types of Home Loan Refinancing

What is Refinance and Types of Home Loan Refinancing

2020/01/14

Refinance is the term used to describe the transfer of a pending debt obligation to another debt obligation with change in terms of repayment of the debt. Refinancing is often undertaken when a borrower wants to change the terms involving the loan. This is mainly opted for when one wantsWhat is Refinance and Types of Home Loan Refinancing

- reduction in interest rates,
- extension of repayment time
- to repay another heavier debt
- to finance an investment
- to secure finances by changing from a variable-rate to a fixed-rate debt
- to reduce the number of payments on the loan or
- to make payments of a dividend.

Many people also opt for refinancing to help maintain easy flow of cash.

By doing a refinance the borrowers can change the amount of monthly payments that are required to be paid on the debt. This is achieved by reducing the interest rate in the loan or by giving time extension on the period of maturity of the loan. There are some schemes that work by lowering the overall borrowing rate.

There are two types of refinancing:

1.No-closing cost
2.Cash-Out

No-Closing Cost

In no-closing cost refinance, borrowers usually pay the upfront fee and get a new loan with different interest rate. This proves to be especially favorable if the current market rate is low by at least 1.5 per cent to your existing rate. In this case refinancing doesn’t cost much.

Cash-Out

Cash-out is used for repaying short term loans. This can be availed for debt consolidation, credit card repayment or home improvement. The criterion is that the borrower must meet the current home equity. Cash-out refinance cannot help much with lowering of the monthly amount on loan.

When a person opts for refinance, he/she has to pay the closing and transaction fees that is compulsorily required to be paid. In some schemes this fees might be more than the savings earned from refinancing the loan. Refinance should be considered only when one is sure that it would bring savings or if it will help managing the finances better by extending the repayment period.

There are fixed-term debts that operate on penalty clauses or call provisions. Then there are other refinance loans that have low payments initially but these can amount to a bigger total interest rate. It can also prove to be riskier to the borrower that the current loan plans. Hence it becomes important to calculate the up-front, ongoing and other fluctuating costs before taking the decision of refinancing.

What is Refinance and Types of Home Loan Refinancing personal-finance

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