What is Loan Refinance?

When you have an existing debt that is very hard to be repaid and you replace it with another debt, it is called loan refinancing. The most common type of refinancing is mortgage refinancing. There might be many reasons to switch to a new loan. For instance the interest rates on your old loan might go up or you might become eligible for a lower rate mortgage. Under such cases it is much more advantageous to switch to a new loan rather than wait out your old one before getting a new one. This is done by refinancing.

There are many advantages of loan refinancing. The biggest of them is that you might be able to get a newer loan for reduced interests. Also getting a new loan might extend your time period giving you much more time to repay the loan. Also you can switch from variable rates loans to fixed rate loans if you feel the future might not be risk free. People also go in for refinancing when the economic conditions are good and it might be cheaper overall to get a new loan.

However there are also a few disadvantages of loan refinancing. Extending the period of the loan might not always be advantageous as the longer you take to repay the loan, the more is the interest you have to pay. Also you might have through go through loan procedures again pretty much the same ones you went through for your first loan and that could get tiring.

If you decide to get a new loan with variable interest when the times are good, it could change for the worse in the future causing you to pay more interest than you intended. Therefore before you choose refinancing, it is important to consider all the pros and cons carefully or you could end up with more trouble than what you had to start with.

The reasons why people go in for loan refinancing are varied. In Canada the most common reasons are students being unable to meet their financial needs, people who wish to renovate their homes, emergency medical bills, sudden credit card bills they are not able to pay and other crisis. Under such conditions when people already have a mortgage on their houses, refinancing is the best way out. Yu could switch to a new mortgage under such conditions offering the same house as collateral and use it to lower your interest rates and hence ease out your financial burdens.

To sum up loan refinancing has its own advantages and disadvantage. It is impossible to develop a generalized rating for it. You should approach your bank for any further information and carefully consider any pos and cons before you choose to refinance your loan. Many people have chosen refinancing as an option and have become debt free thanks to it. However, remember that they are only debt free because they found a sensible plan that works best for them but mostly because they followed it through responsibly.

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