Home Loan Refinancing

Every time the rate of interest dips, homeowners rush to get their home loan refinancing in place. However, such a hasty move might often have hefty impacts in the long run. Well, lower interest rates are just a smaller picture of the whole process, and there are times when the homeowners get their houses refinanced with negative effects occurring in the future. Without even realizing it, these people add on to the principal amount each time they refinance the home loan. Associated costs, longer amortization period and bigger mortgage are some of the most common drawbacks to refinancing home loans.

What is refinancing?

A purchase money loan is a type of loan that you borrow from the bank in order to buy the house. However, on the other hand, a refinanced loan is something that you borrow when there is a fall in the rates of interest to pay off the original home loan. So, in simpler words, a refinanced loan is the loan that is taken out to pay the home loan at lower interests.

Benefits of Refinancing

Even though refinancing can sometimes turn out to be the wrong choice, it can also have some associated benefits at other times.  Let us take a quick look at some of the benefits of refinancing.

  • Low monthly payments – if you are someone who is able to bear the refinancing costs, lower rates of interest and lower monthly installments are going to ensure a better flow of cash on a monthly basis for you.
  • Shortening of the amortization period – in case you have a lower interest rate which is lower than the previous rate of interest, you might be looking for ways to shorten the term of your loan. In exchange for a slightly higher mortgage payment, you can enjoy the benefit. However, before you finally take the step forward, it is recommended for you to figure out if you could invest the principal amount elsewhere for a better return rate.
  • Cash in hand – through refinancing the home loan, there are many borrowers who get the cash and invest the same at a higher interest rate than the new interest rate.

Refinancing Costs

Refinancing your home loan can charge you the following fees, which are either rolled into your loan or paid through a higher market interest rate.

  • Loan origination
  • Inspection
  • Processing
  • Application
  • Document preparation
  • Credit report
  • Appraisal
  • Title policy
  • Notary
  • Escrow fee
  • Reconveyance
  • Beneficiary demand
  • Delivery and courier
  • Recording
  • Tax service

In addition to the above-listed fees, there are chances that your lender might ask for some other fees as well depending upon their lending policies. However, these are mostly garbage fees which can be negotiated by any borrower. It is thus advisable to ask upfront about all associated fees to your lender before closing the loan.

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Written by Manish Agrawal

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