Refinancing is the substitution of an existing loan liability with a new loan liability under different terms. Such refinancing will take the current debts of a person and convert them into one loan liability. This is done by refinancing a home equity loan, refinancing a personal loan, or refinancing a student loan held by the borrower. There are many types of refinancing. It depends upon the requirements of the borrower and the prevailing interest rates in the market.
The refinancing of a mortgage is a smart option among borrowers who want to reduce the debt burden. Refinancing helps a borrower to consolidate existing high-rate debts into a single manageable payment. It also allows the borrowers to reduce the monthly installment amount of their first loan.
Home equity refinancing can be used for refinancing existing mortgages. It is done by taking out a second mortgage or by combining both the mortgages. A second mortgage is secured against the borrower’s home. If the borrower fails to pay the mortgage payment on time, then the equity in his home gets pledged as a security for the second mortgage. This increases the equity of the home and reduces the borrower’s debt to some extent.
Another option for refinancing existing loans is a home equity line of credit (HELOC). It is a revolving credit that is used to make small monthly payments. HELOCs have low interest rates and thus help to reduce the borrower’s debt to a certain extent. The interest rates of HELOCs are variable and may change according to the prevailing market rates.
Borrowers who are looking for refinancing loans with low interest rates should approach multiple lenders. Lenders from different lenders offer different loan products. Different lenders also charge different rates of interest. Therefore it is important to compare different loans offered by different lenders. Some of the important factors that should be considered while refinancing a current loan include the term of the loan, the APR, amount to be refinanced, the interest rate, and whether the new loan is secured or unsecured.
One option for refinancing a current loan is to take out a home equity loan or a fixed-rate loan. A home equity loan can be used to pay off existing debts and to reduce the outstanding balance on the borrower’s existing loans. The borrowers do not have to deal with increased interest rates when they take out a home equity loan. Home equity loans are available for thirty years, but in some cases the terms of the loan may be lengthened to forty or fifty years. In case a borrower takes out a thirty-year mortgage and then wants to extend the term, he may have to give an additional amount to the lender in advance.
Borrowers can also go in for refinancing if they want to extend the terms of their existing mortgage loans. Mortgage lenders would not like to refinance a ten-year mortgage into a fifteen-year mortgage because it would cost more money. Hence, mortgage lenders will usually not allow refinancing to extend the term of the mortgage at all. If you need longer time to repay your mortgage, you may consider taking out a cash-out mortgage instead of a refinance loan.
Another reason why people refinance is to take cash to invest. There are many people who take cash out of their retirement savings and invest them in real estate. Some mortgage companies also allow their clients to take cash from their current account and invest it in real estate. If the interest rates in the real estate are low, you can earn a much better return than you could on your current mortgage payments.