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
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
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
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
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