Refinancing may be a good financial decision if you can seize its benefits but sometimes, its benefits may fade due to external or internal factors. So, in order to see if refinancing will be to your advantage you need to know what the real benefits of refinancing are and how and when they can be obtained.
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There are many financial implications associated with home loan refinancing. There are also many variables to consider both internally (loan terms) and externally (financial situation, market conditions, etc.) before going for a refinance mortgage loan. The following benefits may or may not apply to you according to your financial situation and the terms of your current mortgage loan:
How Does Refinancing Affect Your Finances
There are many advantageous situations you can enjoy by refinancing your home loan. However, you need to be careful because alterations to the loan terms may result in a worsening of your financial stance. Let’s analyze some examples of how a refinance loan may affect some financial variables positively or negatively:
Debt to Income ratio is the share of your income that is compromised towards debt payments. An increase on this ratio affects your finances negatively and diminishes your ability to get finance. Refinancing your home loan for a shorter repayment program or a higher interest rate will affect this variable negatively while refinancing for a longer repayment program or a lower interest rate will affect the variable positively.
Debt Exposure is the amount of money you owe on any given time. Short term debt and long term debt are not a problem as long as they are spread evenly and you do not have too much debt due on a short period of time whether it is soon or in many years. Refinancing your mortgage loan and extending or shortening the repayment program can either affect your debt exposure positively or negatively according to your remaining debt situation. If by refinancing you accumulate too much debt on any given time your debt exposure will worsen.
Lowering Monthly Payments to Cancel Higher Rate Debt
Refinancing for a higher interest rate is not always a bad exchange if you get a longer repayment program and lower monthly payments because you can use the surplus of your income to repay other debt that will probably have an even higher interest rate than that of the new refinance home loan. As you can see, what otherwise would be increasing your overall debt, may reduce it if you have other more expensive debt. So if you have unsecured debt with high interest rates, refinancing with a higher interest rate but lower monthly payments will free a portion of your income and let you use it for canceling your unsecured and more expensive debt.
Cash Out For Personal Purposes
Another benefits you can obtain from a refinance home loan is cheap financing for personal purposes. By refinancing for a higher amount than your outstanding mortgage you can get cash out from the new loan and use it for whatever you want. It is a cheap source of finance as long as your current mortgage does not have significantly more advantageous terms.