How does Refinance Work?

What is Refinance?

Refinance is a word that refers to the process of raising a loan to pay off another loan. Refinancing lets people take advantage of lower interest rates of loans. People often refinance their loans to reduce the monthly payments or improve the loan terms. The borrowers chose this method to secure a better deal and more flexibility with the money. In essence, refinancing is a financial strategy that people exercise to replace an existing debt obligation with a new one, typically with more favourable terms....

How does Refinance Work?

Refinancing is a financial strategy that gives a way to a borrower to change the terms of the loan and take benefit of the change in the rate of interest of the loans. The process of refinancing can vary depending on the type of loan being refinanced. The process involves the following:...

Types of Refinancing

1. Mortgage Refinance: It is a refinancing where an owner of a house replaces the existing mortgage with a new mortgage. The foremost objective of doing mortgage refinancing is to take advantage of lower interest rates. Mortgage refinancing often involves making a check on the credit of the borrower. A higher credit score can help borrowers qualify for better interest rates and terms. The mortgage refinancing further has the following types of refinancing....

Examples of Refinancing

1. Mortgage Refinance: Mr A has 20 years of fixed rate mortgage. The rate of interest on this loan is @9%. At present, due to some economic factors, the rate of interest has fallen to 6%. Now, Mr A can take advantage of the decreased rate of interest by refinancing their existing mortgage loan with the new one of @6%....

Advantages of Refinancing

1. Low-Interest Rates: The main objective of exercising the option of refinancing is that the borrower gets the benefit of lower interest rates when he exchanges an existing loan with a new loan. Lower interest rates help to reduce the monthly payments and overall cost....

Disadvantages of Refinancing

1. Increased Monthly Payments: In refinance, borrowers tend to shorten their period for repayment of loans. Shortening the repayment period will have a direct impact on the monthly payment. The monthly payment of the person will likely increase due to this....

What is Corporate Refinancing?

Corporate refinancing is the method of restructuring the existing debts of a company to reorganize its financial responsibilities. It is done by the companies for various reasons such as increasing maturity period, improving the credit score or improving the cash flow of the company. Companies take advantage of economic changes such as a decrease in the rate of interest on loans due to various factors, changes in the terms of the loans, introduction of schemes, etc. A company with asset-based financing may refinance to access additional funds or secure more favourable terms based on the value of its assets. The companies can make use of the additional funds to expand the business or to maintain the inventory of the business. When a company requires financing for expansion or working capital it tends to refinance its existing credit facilities to accommodate the funding needs. The reason for corporate refinancing can be a reduction in the company’s revenue, a threat to solvency, consequences of litigation, insufficient investments, etc....

Refinance – FAQs

What is the impact of refinancing on credit score?...