Are you having difficulties managing and/or repaying your loan? Do you want to alter the terms of your loan? If yes, look no further. Here’s what you need to know;
What is loan refinancing?
Loan refinancing can be defined as the replacement of an existing loan with another loan under different terms. The term loan refinancing is very common in the mortgage loan industry. Loan refinancing is available to individuals who face financial difficulties meeting their loan repayment obligations. Loan refinancing (also known as debt restructuring) allows borrowers to get more favourable loan terms making it easier for them to meet their repayment obligations.
A loan can be refinanced for many other reasons i.e.
• To alter or reduce risks i.e. when switching from a variable rate to fixed rate loan.
• To reduce monthly repayment amounts.
• To consolidate debt i.e. combine many loans into one manageable loan.
• To capitalize on better interest rates. i.e. by lengthening the term of the loan.
Loan refinancing is, therefore, beneficial to buyers who aren’t necessarily in distress as well. All in all, loan refinancing makes it easier to manage debt over a long period. For instance, if high-interest debt is consolidated with long-term debt like a mortgage, it becomes easier to pay it off over a prolonged period. Loan consolidation also has some tax advantages in some countries.
Why should you refinance?
If the interest rates have fallen since you took your loan, you can refinance to benefit from the low rates if you had taken a fixed rate mortgage. You can also refinance to enjoy a fixed rate if the rate appears to be rising. Refinancing is also advisable when you want to use your home’s equity. If your home appreciates in value after taking a mortgage loan, you can refinance to borrow against your home’s equity.
Top benefits of loan refinancing
1. Better loan terms: Loan refinancing allows borrowers to enjoy better terms i.e. a reduction in interest rate charges as well as lower monthly repayments. It is also possible to lengthen or shorten your repayment time by refinancing.
2. Additional borrowing against equity: Loan refinancing also gives borrowers (mortgage borrowers) an opportunity to borrow more i.e. when a home appreciates in value. The borrowed money can be used for investment purposes.
3. Better loan management: Loan refinancing allows borrowers especially those with multiple loans to be able to manage their loans better.
4. Reducing loan risks: It is also possible to reduce risk (interest rate risks) by refinancing your loan to enjoy a fixed or adjustable interest rate depending on market fluctuations.
5. Quick loan repayment: Loan refinancing also allows borrowers the opportunity to be able to repay loans off faster. This benefit applies mostly to mortgage loan borrowers. By restructuring your mortgage loan, you can alter the loan term and pay off the loan faster.
Disadvantages of refinancing
Loan refinancing has some cons to. They include;
1. The gains enjoyed when you refinance your loan can be eaten up by applicable fees, paying points or closing costs. For instance, you might be charged a penalty for repaying your mortgage early. In such an instance, you may not enjoy any cost benefits. You must determine the true/real costs of refinancing before you actually do it just to make sure it makes financial sense to you.
2. Borrowing against your home’s equity may work against you if you are borrowing to spend on liabilities i.e. instead of investing. You also end up owing more money when you refinance your mortgage.
3. It is also possible to pay higher interest even after refinancing your mortgage. There are always interest rate risks that are hard to get rid of. For instance, it is difficult to predict interest rate movements with certainty before they actually happen.
Loan refinancing may be a viable option when you want to manage your loans better or when you simply want better terms. You should, however, beware of the cons of loan refinancing. In some cases, you may end up in a worse financial position. Weigh the pros and cons. Also, consider seeking professional advice to make sure financing benefits you.