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Types of Refinancing

By ResidenceBuy India  |  0 comments   |  1676 views  |   Feb 17 2012

Types of morgage refinancing schemes and understand other fees associated with mortgage refinance:

Term refinance
:
As the name suggests, here the borrower reduces/increases the term of the loan without changing anything else. Increase (decrease) in loan term leads to lower (higher) EMI and higher (lower) interest burden. So suggest you to exercise caution and take all facts into consideration. We suggest that if possible always reduce your loan term to save on interest cost.

Rate refinance:
In case of rate refinance, the focus is on changing the interest rate. If a borrower is stuck with a high fixed rate and expect the interest rate to go down the first impulse is to do either a fixed rate refinance or move to a lower variable rate product. In either case your monthly EMI will go down, but the short run benefit will be higher if you move to a variable rate loan. However, see above for pros and cons of moving to fixed rate or variable rate mortgage.

Term and Rate refinance:
This is a combination of pure rate and term refinance. In this case the borrower has the flexibility to choose both. Our advice is not to focus on the current EMI change and take other factors like rate reset future interest burden into consideration.

Cash out refinance:
If you have a low remaining mortgage balance and the house value is significantly higher than the loan amount, you have the opportunity to get cash out by refinance (thus the name). Under this scheme you draw equity from the current home for present spending and pay it back to the lender over time.In a rapidly rising housing market this appears as a very attractive option. If you have other high interest bearing debt then it is a good debt consolidation option. However, we advice against taking this option to finance big ticket spending as it is tantamount to debt financed consumption. You will also take longer to retire the mortgage loan.

Understand other fees associated with mortgage refinance: Interest cost is only part of the story (even if a big part). Remember that you'll have to pay about 0.5 to 2% percent of the loan amount (with a floor of Rs 5000) in additional administrative fee. This gets added to your loan amount and apart from paying this additional fee; you also pay interest on it over the life of the loan.


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