It doesn’t really matter whether you have children in college, have excess personal debt, are looking to invest in a business, want to pay off your auto loan, or simply want to go on the holiday of a lifetime, at some time or another most of us will consider the option of a home loan refinance. So, what is a home loan refinance, and are there any pros and cons?
A Home Loan Refinance Explained
Simply put, a home loan refinance is where a homeowner will ask a lender to refinance their existing home loan, plus lend against the current equity value in the house. Essentially what this means is that you have an outstanding home mortgage loan of $100,000 with a home valued at $250,000,000. Therefore, you ask a lender to lend you $200,000,000 in return for which you will provide the lender with a mortgage over your home. Of the $200,000,000 borrowed, you repay the original home loan lender the $100,000,000 outstanding and the remaining $100,000,000 you use. As you can see then, effectively you have just refinanced your home.
The Pros Of A Home Loan Refinance
The overwhelming pro of a home loan refinance is because it is a secured refinancing arrangement, the interest rate is going to be much less than if you tried to refinance by means of an unsecured loan. Moreover, if the home loan refinance has been arranged to pay off consumer debt, you’re guaranteed to be paying a lot less in interest rates than would be the case with unsecured consumer credit.
The Cons Of A Home Loan Refinance
Unfortunately, there are a number of cons with home loan refinancing that you need to carefully consider before deciding on this refinance method. The number one concern you have with a home loan refinance is the fact that you have just provided security over your number one asset – your home. So, if at any time you cannot make repayment of the refinanced home loan, you’ll run the risk of losing your home. Consequently, you need to make sure you’re not going to have any problems with financing your home loan before deciding to proceed with this type of refinance.
The second con with a home loan refinance is that it unlikely that your existing home loan lender is going to allow you to make early repayment of their home loan without having to pay some sort of penalty clause. Exactly how much of a penalty you may need to pay you’ll need to check in your existing home loan agreement – but this fee could be high enough to make sure that it is not of economic benefit, given that you provide your home as security, for you to consider this as a viable means of refinance.
The last con to be aware of with a home loan refinance is that your new lender may stipulate that you cannot make early repayment of the refinanced home loan. If this is the case, you’ll not be able to make early repayment of your home loan in the future – should you win the lottery, for example – nor will you be in a position to use this method of refinance again in the future – so check this very carefully!