Refinance is the method to replace or adjust the terms of existing debt obligation like loan, mortgage or credit note. While taking a credit, you take the loan or mortgage at a certain rate of interest. Through refinance, you can renegotiate the terms of your debt obligations like interest rates of your borrowed amount, length of agreement, amount of loan etc. There can be various types of refinance, the most common of which is surely the home mortgage.
Why Go for Refinance in India?
There can be various reasons why people go for refinancing. A loan or mortgage may last for long term and a lot can happen during the time span. One may pay off the large part of his/her finance agreement; equity in the asset (like home, car etc.) may also have built up. One can make the most of the equity stake by going for refinancing. Through refinance, one can borrow more money on the asset. For example, one may have several loans, which he/she can pay off with a new loan. The new loan would offer more favorable rate of interest comparing to the previous loans.
Advantages of Refinance
There can be several advantages of refinancing. People opt for refinance to reduce the rate of interest on the existing loan amount. One can also opt for refinance to extend the repayment time, reduce or alter risk, to pay a dividend, to bring up cash for investment consumption, or to reduce periodic payment obligations etc.
Refinance has the following advantages:
- Refinance may result in bringing down the monthly payment amount by changing the rate of interest.
- It may also change the maturity term of the loan.
- Refinance can also improve the overall cash flow.
- It reduces the risk on existing loan.
- Refinancing can be used to pay off high-interest debt like credit card debt with a low-interest one.
- Monthly recurring bills on the existing loan can also be paid off through refinance.
Types of Refinance in India
Refinance can be of the following types:
No-Closing Cost
In no-closing cost refinance, one get new mortgage loan after paying some upfront fees. This refinance type is suitable for you if the current market rate is lower than your existing interest rate at least by 1.5 percentage points. However, one needs to pay Yield Spread Premium (YSP) to the mortgage company for that.
Cash-Out
Cash-out is suitable for home improvement as well as credit card and other debt consolidation. Here you can refinance larger amount than your existing mortgage. You can keep the cash difference with you.