Why Get Loan Refinance

Defaulting on loans is a natural occurrence and it happens to everyone despite what most people may think. This is due mainly to the rising cost of living, perhaps also due to unforeseen expenses such as illnesses and loss of employment. The most common loan facility that people default on is the home mortgage. Almost one-third of new mortgage applications are for loan refinance to be used as payment for the original loans or to pay for College education.

Refinancing is the acquisition of a secured loan in place of an existing loan and for the same assets. It makes sense to refinance a loan for college education funding or for the following reasons:

  1. avoid defaulting on payment and getting poor credit ratings
  2. reduce interest costs by getting the existing loan refinanced at lower rates
  3. use tax-deductible loan proceeds to consolidate loans (pay off other debts such as credit card debt, which is non-tax deductible); alternately, resulting additional funds can be used to reduce the principal amount and thus lower interest payments
  4. reduce monthly obligations by getting loans for longer terms
  5. reduce risk by converting from variable-rate to fixed-rate loans or vice versa, depending on current finance rate conditions
  6. liquidate equity in part or as a whole resulting from an accumulation during tenure of ownership (in the case of home mortgages); such funds can be converted to cash for other expenses such as to pay college tuition

There are certain factors that need to be considered before refinancing to make sure that it will not drive the borrower deeper into debt. Some loans have early payment loan penalty clauses as well as closing and transaction fees associated with refinancing. It would be best to investigate whether the accumulated amount of these fees would translate in a significant loss of funds.

It must also be determined if the act of refinancing will translate to substantial savings. Another significant thing to consider before refinancing is the possibility that interest costs over the term of the refinanced loan may be greater even with lower initial payments. Risks may also be greater for the borrower under the new terms of the loan than with the original loan.

Refinancing also typically requires the payment of a premium upfront as part of the loan process, which is a percentage of the total loan amount, also referred to as “points,” Depending on the lending institution, points required will vary, but usually paying more points translates to lower interest rates. Some lenders, however, take on a part of the loan as discounts, also called “negative points.” Depending on the lender, the payment of points should be taken into consideration.

There are several types of refinancing, including: no-closing cost refinancing, which greatly reduces premiums and is best used when the current market rate is lower than the rate for the existing loan by 1.5% or more; and cash-out refinancing, which is ideal for debt consolidation and home improvement but will not lower monthly payment or shorten mortgage periods.

With the current mortgage rate market, where rates are increasing, refinancing makes sense because real estate values are going up, which means home values are often greater than the money owed for the mortgage.

Loan refinance will allow homeowner to free up cash for expenses such as college and medical expenses. It also makes sense to switch from adjustable-rate to fixed-rate mortgages to protect the homeowner from increasing interest rates. Of course, the situation may change at anytime, which makes it important to always research before committing to any financial negotiation.

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