Refinance Home Loan

By: EconomyWatch Content   Date: 30 December 2009

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A home loan creates a long-term debt obligation on the borrower. If the interest rate on a home loan is high, the borrower’s financial standing may be adversely impacted. A refinance home loan involves applying for a fresh personal loan with a lower interest rate to repay the original home loan. This relieves the borrower of the heavy burden of interest associated with the initial home loan.

 

Refinance Home Loan: Benefits 

Besides obtaining a lower cost of credit or interest rate, one must consider applying for a refinance home loan for the following reasons:

·        Extended repayment period: A longer repayment period helps to improve the overall cash flow, by lowering the monthly payments towards a home loan.

·        Stability: Home loan rates, particularly in case of an adjustable rate mortgage (ARM), constantly fluctuate. This hinders budgeting and increases the threat of defaults. Conversely, the interest rate of a refinance home loan tends to be steadier.

·        Consolidate debt: A refinance home loan allows borrowers to consolidate multiple personal debts. By setting up a single mortgage repayment, borrowers can simplify their finances and minimize interest payments.

·        Home improvements. Home loan refinancing also helps to finance home improvements, which helps to increase the home equity by adding value to the property.

 

Moreover, some borrowers of refinance home loans qualify for several tax exemptions.

The Downside of a Refinance Home Loan

Before applying for home loan refinancing, a borrower must take into account the following drawbacks: 

  • Mortgage fees: Refinancing may be accompanied by several additional charges, such as valuation fees, arrangement fees and broker fees.

  • Early redemption penalty: Borrowers are often locked-in for a specific period by a home loan lender. Therefore, when a borrower clears the entire debt before the conclusion of this period, s/he may have to bear a heavy early redemption penalty.

  • Teaser rates: Sometimes the low rates of refinance home loans terminate after a specific initial period. Such teaser rates often succeed in luring homeowners, who later struggle with their refinancing home loan terms.

 

Remember that a refinance home loan remains a part of your financial activity for a long time. Some lenders may consider this to be detrimental to the credit rating, making them hesitant to grant loans.

 


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