Home Loan Refinance

By: EconomyWatch Content   Date: 31 December 2009

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Home loan refinance is a process to replace an existing home loan contract with another contract that has more favorable terms. Simply put, home loan refinance offers more flexibility to the borrower in terms of repayment, loan term and loan amount.

Why to Opt for Home Loan Refinance

Most people opt for home loan refinance out of the following two reasons:

  • To reduce interest rate on the debt amount.

  • To have more money so that it is available to make purchases.

While experts recommend refinancing to reduce interest rate on an existing loan, they do not recommend it to make more money for purchases. Refinancing a home loan to borrow more money can lead to a vicious cycle of debt.

A report published by the Mortgage Bankers Association of America proposes an upward trend in the US refinance market after the early 2000s. This process is catalyzed by low interest rate options due to market boom. In 2003, the US refinance market reached the all time high peak. This boom continued till 2005. However, the market fell flat after 2008 economic recession.

When to Choose Home Loan Refinance

While home loan refinance is a good option, it is not meant for every borrower. This is because not all loan schemes are similar. Refinancing is not the best solution to reduce cost with every loan product. Thus, existing loan assessment is essential to determine whether refinancing is beneficial.

Here are some tips which are crucial to arrive at a decision:

  • Based on the thumb rule, opt for refinance only if it lowers the interest rates by a minimum of two percent.

  • Estimate the time required to pay off the loan after refinancing.

Also, refinancing a loan includes additional expenses such as:

  • Mortgage fees

  • Broker and lender fees

  • Third-party charges

  • Government fees

Be ready to pay all this in order to enjoy low interest rate on an existing home loan.

Home Loan Refinance: Checklist

Here are some essential points to consider while opting for home loan refinance:

  • Shop around for the best interest rates. Do a cost assessment study to understand the long term benefits.

  • Read a loan contract carefully before signing.

  • Consider the interest rates, loan term and fees associated with the loan.

Many companies offer home loan refinance schemes with lucrative offers. However, experts say that refinance is a solution only if the long term benefits outweigh initial expenses.


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