« Sub-prime mortgages | Home | Commercial Mortgages »
Refinancing: An overview
By admin | December 14, 2007
Refinancing basically is a situation where a debt is replaced by another one with different terms and conditions and is mostly resorted to in case of a mortgage on a home.
Refinancing is done for a host of reasons that work in the borrower’s advantage including in order to reduce the interest rate, to extend the repayment time, to raise cash etc. Refinancing may also be done to reduce the risk of borrowing. This is done by converting a flexible rate mortgage into a fixed one. By this the rate of interest payable remains constant, thereby reducing the risk of paying a higher dividend. This may also backfire as in a flexible rate mortgage the rate may also fall, but when money is at a premium it is always better to reduce one’s exposure to risks.
Refinancing also has its drawbacks. The cost of refinancing a loan may be more than the risk minimized by doing so and while some refinanced loans may have lower initial payments, the cost of payment over a long period of time may increase.
Refinancing has a unique feature known as points. Points refer to a percentage of the loan which needs to be paid up initially. The points vary from dealer to dealer and plan to plan.
There are two types of refinancing- no closing cost and cash-out. In no closing few upfront fees are paid and as long as the market rate of interest is a little lower than your existing rate it is beneficial to refinance. In cash-out system a person can increase the loan amount and keep the excess amount. This merely increases the amount of money but does not reduce the interest payable.
Thus for many people, refinancing could solve the economic problems that they have.
Topics: Refinancing |
Comments are closed.