What
and Why of Refinanceing
Refinancing refers
to the replacement of an existing debt obligation with a debt
obligation bearing different, preferably better, terms. In
other words, this is when you apply for a secured loan in order to
pay off another different loan secured against the same assets,
property etc. The most common consumer refinancing is for a home
mortgage.
Refinanceing may be done for various reasons. To reduce
interest costs through refinancing at a lower rate, to extend the
repayment time of the loan, to pay off or pay down other debts, to
reduce the periodic payment obligations (sometimes by taking a
longer-term loan), to reduce or change the risk such as by
refinancing from a variable-rate loan to a fixed-rate loan, or
possibly to raise cash for investment, consumption, or the payment
of a dividend.
Refinanceing can alter the monthly payments owed on the loan
either by changing the loan's interest rate, or by altering the
term to maturity of the loan. More favorable lending conditions
may reduce overall borrowing costs and burdens. Refinancing is
commonly used to improve overall cash flow.
Refinanceing is also useful to reduce the risk associated with an
existing loan. Adjustable-rate loans and mortgages have Interest
rates that shift up and down based on the movements of the various
indices used to calculate the interest rates. By refinanceing an
adjustable-rate mortgage into a fixed-rate mortgage, the risk of
interest rates increasing dramatically is removed, thus ensuring a
steady interest rate and payment over the term of the loan however
this comes at a price as lending institutions typically charge a
risk premium for fixed rate loans.
In personal finance, refinanceing a loan or several debts into one
debt can assist in paying off high-interest debt such as credit
card debt, with lower-interest debt such as that of a fixed-rate
home mortgage. For home mortgages, in the United States, there may
be certain tax advantages available with refinanceing,
particularly if one does not pay Alternative Minimum Tax.
A house is the largest asset you may ever own. Likewise, your mortgage payment may be the largest expense you'll have in your monthly budget. Wouldn't it be great to use this asset to reduce your monthly payment and put extra cash in your pocket? When you refinance your mortgage, you can take advantage of the equity in your home and enable this to take place.
