How does refinancing work? Types, Pros & Cons for BorrowersThe process of revising and replacing an existing credit agreement as per the current scenario is called as Refinance.
Refinancing means revising and replacing the terms and agreements of an existing loan or mortgage with a new set of terms and conditions. When a borrower decides to refinance his loan or mortgage, he does so to get more favorable terms, interest rate, payment schedule and other agreements that will benefit him.
Refinancing is typically done when the interest rate in the market changes substantially and the borrower gets a chance to save more on his debt payments from another agreement. During this process, the borrower’s existing credit report and repayment status is checked before he is offered any revisions on the loan terms.
Most common forms of loans that are refinanced are mortgage loans, student loans and car loans.
A borrower typically chooses to refinance their loan when there is a substantial change in the interest rate environment in the market. When the interest rates drop, the borrower may choose to refinance his loan so as to avail lower interest rates and save more on debt payments. They can also choose to refinance when their credit profile has improved and they are allowed to get a refinance at a lowered interest rate.
Whichever the case be, the procedure to refinance a loan is pretty straightforward. The borrower can either approach his existing lender for a refinance or go to a new lender and fill out a new loan application. The lender will then go through the existing loan document and re-evaluate the credit report and financial situation. Once all the checks are completed and the borrower’s credit report qualifies for refinancing, the refinance is approved and the borrower shifts to a new payment plan with a new interest rate.
There are different types of refinancing options available. The most common ones are:
Refinance is a very helpful option for people with limited savings and income. Depending on the needs of the borrower, the type of loan chosen will be different for everyone. It is important to remember that when you refinance, you are confident of paying off the new loan in the future and that the refinance cost doesn't outweigh the benefits. Borrowers must carefully consider the benefits and disadvantages of all types of refinance before choosing one.