Mortgage refinance – a double edged sword

Posted by discuss | NSW Real Estate News | Friday 2 July 2010 1:35 am

Mortgage refinance is a process of replacing the existing debt terms with other debt obligations to aid the repayment with a more suitable and convenient terms and conditions. The most common type of mortgage refinance is the home mortgage. If the debtor is not able to repay the loan installments and is in a distress such types of loan refinance is known as debt restructuring. There could be a number of reasons for the debtor to go for a refinance.

Mortgage refinance can be done to take advantage of a lower rate of interest prevailing in the market as compared to the existing interest regimen when the loan was taken. This will lead to a lesser monthly repayment installment or a reduced repayment term.

Mortgage refinance can be resorted to consolidate the other debt repayments into a single debt so that the repayment installments are more convenient. This type of loan consolidation can lead to a higher term.

If the loan repayment amount is more and the debtor is unable to pay it considering his present financial condition he can ask for the installments to be reduced to a more suitable amount so that he can repay the amount more conveniently. This type of restructuring of the loan amount will automatically lead to the increase of the term of the repayments. Mortgage refinance can be also resorted to reduce or alter the risks for example changing a variable rate loan to a fixed rate loan. Mortgage refinance can also be resorted to generate funds and free up cash for fulfilling any financial requirements. In this case also the repayment term will automatically become longer.

Mortgage refinance is resorted to by the debtor who is in a financial crisis. However the debtor will have to pay back the entire loan as well as the penalties. Thus the debtor will remain a debtor for a longer period. Along with this the debtor’s credit ranking will also take a beating. Mortgage refinance of personal loans like a credit card loan into a home loan will make the repayments more convenient since the rates of interest of home loans are lower and stretched over a longer period. In some countries like in the US tax rebates are also offered with mortgage refinance especially with the home finance.

Before embarking on any mortgage refinance it is better to check a few points. Most of the fixed term loans have a penalty clause which can be invoked if the loan is repaid before time. There could be closing fees and many other types of hidden expenses which must be thoroughly examined. Mortgage refinance can also have transaction fees and winding up charges. All such hidden costs must be calculated and one must ensure that the gains of mortgage refinance are not gobbled up by such charges.

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