Home Loan Refinancing

Refinancing is a banking term that means changing the terms of your current debt obligation to a different one.  This simply means that through refinancing, you can change your home loans to better suit the changes in your financial capabilities.  Refinancing is very common in consumer loans such as the home mortgage.

Home loan refinancing generally works when an individual takes out a new loan, and then uses the funds obtained to pay out an already existing loan. The new loan an individual takes may come from a different loan company; however some people prefer refinancing their old loans with the same loan companies. In the process of refinancing, if the new loan comes from a different loan institution, that company handles processing and paying out the existing loan.

Home loan refinancing may offer more than one benefit over other moves for debt relief and consolidation. Below are just some of the benefits an individual reaps from refinancing:

" Refinancing may reduce a loan's interest rates or interest costs. This normally happens when an individual refinances a loan with a lower interest rate;

" Refinancing may reduce an individual's financial risk (by changing loan types - from variable-rate to fixed-rate loans). Variable-rate loans have fluctuating interest rates calculated based on the value of various indices. By refinancing to a fixed-rate loan, this removes the actual risk of paying unpredictable interest rates which ensures a steady rate throughout the loan terms;

" Refinancing also extends repayment time and reduces payment obligations (by taking loans with longer-terms), and;

" Refinancing is used to raise the value of cash investment, general consumption, and even payment of a dividend.

Home loan refinancing is not always rainbows and butterflies. Most loans with fixed rates contain provisions or penalty clauses. These clauses are triggered by certain events such as early payment of the loan, either in whole or a part of it. To add to this, closing and transaction fees are associated with refinancing loans which may eventually end up costing more than the actual savings refinancing may generate. An individual should only consider refinancing when there is actual savings to be earned, or if one has to extend the loan time.

In addition to this, some loans taken for refinancing may start off with low payments, but may end up in larger interest costs over the whole span of the loan. Depending on the loan type, borrowers may also be exposed to various risks and further obligations.

No Closing Cost
In this type of refinancing, borrowers pay few fees upfront in order to undertake the new mortgage loan. This is the type of refinancing to take when the prevailing interest rate in the market is lower than your current rate by 1.5%, as there will be little to zero cost in refinancing.

However, with the yield-spread premium (YSP), the money you could save upfront is collected back. YSP refers to the cash that mortgage companies receive for attracting borrowers in home loans with higher interest rates. This, in turn, leads to borrowers paying too much.

Cash-Out
This is the least favored type of refinancing, as this may not help lower monthly payment nor shorten mortgage payment terms. However, this type of refinancing is generally used for home improvement, credit card, and other methods for debt consolidation. With cash-out refinancing, borrowers can refinance with loans higher than their current mortgage and keep the cash difference.