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When You're Condisidering a Refinance Loan
Refinancing is such a hot topic today, and rightly so. While I have my doubts about credit consolidation, primarily due to the unwillingness of people to take an interest in their own money, I really like the idea of refinancing because it has so many uses.
What is a refinance loan? Paradoxically enough it is simply another loan secured by the same asset as the previous one. To put it with two feet on the ground, you pay your debt, and immediately take out the same amount of loans. So what's the point? Well, there may be a lot actually. The biggest part of the market that refinancing targets is mortgaging, and this brings us neatly to the advantages.
Mortgages can be taken out for as long as 20 years and the market conditions change a lot through these years. If you took your loan out on a fix interest, but since then interest have been lowered on average, you are paying more than someone taking out a mortgage today. This is because variable interest loans' interest is calculated in a fashion that follows the trends of prime rates, which are usually the interest rates of the most secure investments. You may want to take a mortgage with today's conditions instead right? It is common to replace a variable loan mortgage with a fixes one, thus not only having a better interest rate, but one that is shielded against interest rate fluctuations. So it is possible to take out another loan, with that loan repay your mortgage and have your new loan as your mortgage. Thus, your loan is secured by the same asset.
Alternatively, you may want to lower the monthly amount you pay, you can also do this with refinancing. If you have a 10 year mortgage, you can refinance it with a 15 year mortgage, significantly lowering the monthly payment.
Take Into Consideration
Refinancing does not mean that you will be better off automatically though. In theory you should look at your cash flow and do some net present worth calculations. I appreciate that not everyone can do this, so I'll describe essence of it. You have to take the money you got, ie: the loan amount and subtract from it all of the payments. I mean interest, monthly payments, fees, and so on. A catch though is, that you have to also take the interest rate into consideration. If the market average interest rate is 10% and you are paying 8% (you will never be lucky enough of course) you could just take all the loan money and invest it at 10%. You can pay back the loan and also have 2% for yourself. Overall, just think common sense, and try to cover all the options.
Applying for a refinance loan is different everywhere, even between banks, I really should put this into the take into consideration section. The problem with refinancing is that you have to pay back your original loan in advance. There may be some clauses in your original contract that don't allow you to do this, or charge you a load of money if you do. If you take out your calculator and come up with the fact that refinancing is still the way to go, then go ahead.