Refinancing – Types and advantages

If you want to readjust the mode of repayment of your current loan by altering the loan terms/conditions, you can think of refinancing your loan. Refinancing allows you to get a lower interest rate, convert fixed-rate mortgage to adjustable-rate mortgage, or vice versa.

Types of refinance:

Depending on your financial need, there are two basic types of refinancing:

a) Cash-out: This type of loan can be used for home improvement, debt consolidation and credit card pay off. A borrower can refinance with a loan amount, which is greater than his current mortgage, and can keep the cash difference, if he qualifies with the current home equity.

b) No-closing cost: A borrower may get a new mortgage loan by paying few upfront fees with this type of refinancing. If you find that market interest rate is lower than your existing interest rate at least by 1.5% or more, then you can go for this type. However, not all lenders will give you this offer.

Advantages of refinancing:

Before you apply for this loan, you need to find out whether the interest rate is truly low and you can get any benefit from it. You can also take advantage of refinancing by extending/shortening your repayment time. In the US, if you do not pay Alternative Minimum Tax then you may get some tax advantages if you go for refinancing.

Risk in refinancing:

Before applying for refinancing, you should minutely go through all the clauses in your existing loan. In some mortgages, early payment of the loan demands some extra charges. Some mortgage firms charge extra for closing and refinancing debt. So it is advisable to calculate the variable costs of refinancing and see whether there is truly a substantial cost saving.

If you go for proper refinancing it can be a great financial move for you, because, it modifies the repayment term of your loan, reduces your mortgage payment and also helps you to build more equity quickly. Thus, if carefully used, it will prove to be a valuable means to get your debts under control.