The concept of refinancing a loan:

A loan refinance means applying for a second loan to replace the existing or first loan. In case of a refinance the loan amount remains the same but some of the other loan conditions change. Because of the changes in the other loan conditions the borrowers get some additional benefits. And these benefits prompt a borrower to go for a loan refinance.

Benefits of a refinance to a borrower:

The new loan may be having a lower rate of interest and because of this a lower interest cost to the borrower.

The repayment period could be longer resulting in lower monthly installments. Borrowers opt for this when they want to spend their money elsewhere and are ready to pay the installments for a longer period of time.

If the borrower is currently having a loan in an adjustable rate system he/she may want to switch over to a fixed rate system to reduce the risk of an upward increase in the interest rates. liquidating home equity into cash (cash-out refinance),

Costs associated with refinance:

A homeowner loan refinance involves the following costs: homeowner application fees, homeowner loan origination fees, and appraisal fees. The borrowers should take into account these costs while deciding on a refinance. If the costs associated with these fees exceed the savings due to refinance it makes little sense for the borrower to go for the refinance.

The factor to be taken into account = (Savings on interest due to refinance) (total refinance costs + prepayment penalties). Only if this factor is positive the borrowers should go for refinancing the loan.

Care to be taken while using online calculators:

The online calculators available may not take into account all the costs associated with a particular way of refinancing. This in turn may lead to a wrong decision on the part of the borrower. So care should be taken while using the online calculators.

If you intend to go for a cash-out refinance:

Homeowners planning on a cash-out homeowner loan refinance to liquidate equity for large expenses should consult a financial advisor. The financial advisor may help them in planning and seeing the costs and benefits of doing so. The advisors can also guide them with the stipulations or requirements if there are any from the lender both before and after refinancing.

A last word

The borrowers should be very cautious while planning on a refinance and should do the cost and benefit calculations thoroughly. Since for most of the borrowers their home would be their single biggest asset the time spent in analyzing the options is worth it.