Home Refinance
A refinancing loan occurs when one applies for a secured loan to replace an existing loan using the same assets. It is common to refinance an auto loan, a home loan, and one or more student loans. Each type of refinancing has its own particular requirements, restrictions, advantages and disadvantages, and process, but in concept they are all similar.
The reasons to home refinance could be reduction of the interest costs by locking into a lower rate or extending the payment period or to reduce the risks involved in a variable interest rate by securing a fixed interest rate. The money saved could then be applied to the principal of the loan, thereby further reducing the indebtedness. Alternatively, the refinance loan may be used to pay down other types of indebtedness.
Risks involved in home refinancing include the existence of penalties applied to early repayment of the loan. Application, closing and transaction fees are usually associated with the restructuring, adding to the ultimate cost. It is important to ascertain that the savings generated outweigh the costs. One must also ensure that the total interest costs over the life of the refinanced loan do not nullify the savings of initial lower payments.
Lenders who offer refinance loans often require a lump sum upfront payment representing a percentage of the total loan amount. This amount is expressed in "points" or "premiums" with each point representing 1% of the total loan amount. More points are usually associated with lower interest rates so the borrower is, in effect, paying a higher upfront cost in exchange for a lower monthly premium later on.
Consider avoiding a home refinance loan that is designed primarily to create more debt. For instance, it is risky to pay off credit cards with part of the principle of a refinanced loan and then continue to use the credit cards to incur further debt | ||||||
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