Refinance can be termed as a modification of existing loans in which the loan is replaced by another loan. The new loan acquired will carry the same interest rate, terms, and conditions as the original loan. Refinancing is basically the replacement of an existing loan with a different loan under similar terms. This process has the potential to alter your financial situation radically and may even lead to bankruptcy if the terms are not properly understood. You can refinance for various reasons like to reduce or eliminate your debt, consolidate existing debts, obtain lower interest rates, and pay off high-interest debts.
Usually, refinance is beneficial for borrowers whose debt payments are becoming unaffordable due to high-interest rates. It helps them consolidate existing debts by extending the period of repayment of the original loan. A refinanced mortgage loan has the flexibility to carry a lower interest rate than the existing one. Moreover, this helps the borrowers to pay off the loan installments within a fixed time period.
Refinancing for home mortgage loans is a smart option if the borrowers have been paying high-interest rates on their student loans. The Federal Perkins Loan program allows for refinancing student loans. A borrower can also qualify for refinancing on the basis of his or her income. For refinancing of mortgage loans, a borrower needs to approach a lender who offers such type of loans, whether online or offline. There are several online mortgage lenders that offer refinancing facilities, especially for students.
The Federal Reserve bank has introduced the Refinance Home Mortgages program, offering refinance options on the basis of prime rates. This refinance program enables borrowers to refinance existing mortgages for a lower rate. In addition, refinancing on the basis of interest rates also help borrowers to lock the refinancing rates at current market rates. Such refinancing programs help the borrowers to benefit from the current low-interest rates and make it possible for them to pay down the debts in time.
It is a good idea to refinance on lower interest rates. However, this does not mean that you should just settle for a refinance with the introductory lower rate. Check out for additional charges, additional paperwork and terms and conditions. It is important to understand each and every point of your current mortgage contract and find out if you can get these refinanced at better prices. It is always wise to compare the different refinance deals before deciding on a new mortgage contract. A number of comparison sites are available on the Internet to help you decide on the best refinance deal.
A major disadvantage of refinancing on a lower interest rate is that you may incur higher closing costs. This is because the lender charges additional fees for the prepayment of the mortgage term loan and the closing costs associated with the refinance mortgage. These fees include application, title and processing fees and any lender charges. So, it will be prudent to shop around for the lowest closing cost and to choose a lender who offers the least number of fees.
Refinancing on lower interest rate reduces the monthly payments considerably and helps to improve credit score. You have to spend more time planning for the refinance and paying down the debt in time so that you do not have to make payments for the entire period. However, if you do not stick to the plan, then you are liable to incur a penalty. Refinancing has to be done carefully and it is important that you choose a reputed lender. The new lender will charge a higher rate of interest.
There are many advantages of refinance on lower interest rate. You can save a lot of money every month on the monthly payments. You will also have the flexibility to make adjustments to the plan as per your convenience. However, you have to make sure that the new home loan repayment plan does not have any prepayment penalty so that you are not left with an unpaid balance at the end of the term.