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Go where there is money with refinance
homeowner loans.
The concept of refinancing a loan:
A loan refinance means applying for a second loan
to replace the existing or first loan. In case of a
refinance the loan amount remains the same but some
of the other loan conditions change. Because of the
changes in the other loan conditions the borrowers get
some additional benefits. And these benefits prompt
a borrower to go for a loan refinance.
Benefits of a refinance to a borrower:
- The new loan may be having a lower rate of interest
and because of this a lower interest cost to the borrower.
- The repayment period could be longer resulting
in lower monthly installments. Borrowers opt for this
when they want to spend their money elsewhere and
are ready to pay the installments for a longer period
of time.
- If the borrower is currently having a loan in an
adjustable rate system he/she may want to switch over
to a fixed rate system to reduce the risk of an upward
increase in the interest rates.
- Liquidating home equity into cash (cash-out refinance)
Costs associated with refinance:
A homeowner loan refinance involves the following
costs: homeowner application fees, homeowner loan origination
fees, and appraisal fees. The borrowers should take
into account these costs while deciding on a refinance.
If the costs associated with these fees exceed the savings
due to refinance it makes little sense for the borrower
to go for the refinance.
The factor to be taken into account = (Savings on
interest due to refinance) – (total refinance
costs + prepayment penalties). Only if this factor is
positive the borrowers should go for refinancing the
loan.
Care to be taken while using online calculators:
The online calculators available may not take into account
all the costs associated with a particular way of refinancing.
This in turn may lead to a wrong decision on the part
of the borrower. So care should be taken while using
the online calculators.
If you intend to go for a cash-out refinance:
Homeowners planning on a cash-out homeowner loan refinance
to liquidate equity for large expenses should consult
a financial advisor. The financial advisor may help
them in planning and seeing the costs and benefits of
doing so. The advisors can also guide them with the
stipulations or requirements if there are any from the
lender both before and after refinancing.
A last word….
The borrowers should be very cautious while planning
on a refinance and should do the cost and benefit calculations
thoroughly. Since for most of the borrowers their home
would be their single biggest asset the time spent in
analyzing the options is worth it.
Summary
A loan refinance means applying for a second loan to
replace the existing or first loan. There are some benefits
of refinancing like a lower interest rate, extended
repayment period etc which prompt the borrowers to go
for refinancing. The borrowers should be very cautious
while planning on a refinance and should do the cost
and benefit calculations thoroughly. Since for most
of the borrowers their home would be their single biggest
asset the time spent in analyzing the options is worth
it. If need is felt then a financial advisor should
be seen.
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