Refinancing is the replacing of an already-established debt — often in the case of a home mortgage — with a debt obligation that has different terms. Changing terms can include the interest rate, the remaining balance on the loan, or the maturity date of the loan. There are certain risks as well as advantages that can be brought on by refinancing a home mortgage loan.
Although refinancing can present risks to the borrower, in some cases it is the best option to avoid foreclosure. The life of a loan can be extended through refinancing. Often, this means smaller monthly payments but a larger percentage being spent on interest. There are also penalty clauses contained in many mortgage agreements that are set up to prevent the loan from being paid off all at once. Sometimes these penalties make it impractical to refinance.
Many people overlook the closing costs and fees that accompany refinancing as well. It is generally not wise to refinance until careful consideration of potential savings has been done or unless refinancing is necessary due to temporary loss of steady income. However, sometimes the advantages outweigh the risks.
There are several positive aspects of refinancing, and in many cases refinancing can help to save money over time. By refinancing at a lower interest rate, less money would be spent on interest and a larger percentage would be spent on the debt itself. To reduce monthly payment costs would extend the repayment time, but would also free up more money to pay off other debts that may have higher interest rates. Again, this could save money over time.
Refinancing from a variable-rate to a fixed-rate loan could reduce some risks associated with home mortgages. In most cases of refinancing, an improvement in cash flow is obtained, either by reducing interest rates and/or altering the term to the maturity of the loan. In some favorable refinancing conditions, the borrowing costs may be dramatically reduced overall. A qualified lender will be able to determine how refinancing can impact your life and your checkbook.