Refinance Definition
The word “refinance” itself stand for “finance again” because the prefix “re” stands for “again “.
When the same property is used as collateral for getting a new loan with a purpose to repay the first loan then it is called Refinance. In other words Refinance is a financial instrument by which the first loan is repaid by a new loan.
People usually resort to refinance only when there is financial crunch or they want to get rid of the loan as fast as possible or they want to change the terms of the first loan.
When the borrower is feeling the financial crunch he/she would first like the rate of interest and monthly payment to reduce so that he/she can be at ease with the current monthly income. In such conditions the borrower is going to seek a lower rate of interest in the refinance loan. The borrower would be even willing to do the monthly payment for a longer duration if his needs are satisfied.
On the contrary it is possible that the financial condition of the borrower has improved and he/ she would like to get rid of the loan as fast as possible but the terms and conditions of the present loan are not allowing him to do so. In such circumstances he/she would like to get rid of the current loan by a refinance and then pay more monthly payment to get rid of the refinance.
It is also possible that the borrower may want to switch over from Adjustable -rate mortgage to fixed rate mortgage. For this purpose he / she would like to use the facility of refinance.
Sometimes the borrower knows that the price of the property has appreciated and wants to take advantage of that but the current loan is not allowing him to do so. In such a situation the borrower may seek refinance not only to pay the first loan but also to get some extra money that he/ she can use of other purpose such as renovation and maintenance of house or education of the children.
One should check the negative aspects such as prepayment fees attached to the current loan. It is also possible that the monthly payment of the current loan may have not been regularly at some time. These factors have adverse affect on the refinance because they increase the cost to the borrower.
One should be careful that going by the definition does not mean that refinance is always going to bail you out of the present financial crisis. One has to study the terms and conditions and all the expenses related to refinance before availing it otherwise the situation can go from bad to worse and you may risk losing your home or car or whatever the collateral is.
