Refinancing

The world has become a global market and sitting at just one place you can buy for yourself whatever you want. Countries and their boundaries have no meaning when it comes to satisfaction of human wants, which as we all know are unlimited. The most important factor as per economists for the satisfaction of human want or the fulfillment of demand is to have money and also have the ability or the desire to spend that money for the satisfaction of wants.

Yes, it's absolutely true, that without finance, the neighborhood market leave alone the global market fails to fulfill human desire. In earlier times it easy difficult o arrange finance in times of need and people would often procure it form their personal sources. Times have changed to a great extent, today we have numerous companies and corporate houses which specialize only in financing activities.

Financing basically means letting someone else take the liability of paying of what you are buying against a security provided by you. The whole structure mostly depends on anticipated income theory, which the financial firms follow.

This was a small introduction to make the refinancing factor more clearly in the minds of the people, because it is not possible to make clear the idea of refinancing without explaining in a nutshell what is financing and for what is it needed.

What is refinancing?

When we finance a certain thing, we actually borrow money and pay for a product or service, against a security provided by us for the borrowed amount. Refinancing can be defined as a procedure of getting a secured loan which is directed in replacing the old loan, with the same assets.

In layman's words, when you apply for another loan to payoff or write off the old loan, keeping the secured assets the same, it is known as refinancing. It's nothing but shifting the old liability to a new one. It is also known as mortgage financing.

Refinancing is done for very many reasons some of which can be difference in interest rates of the firms from which you borrowed and the other in which you plan to shift the loan, or inability to pay off the old loan, so taking a new one, to cut down the payment obligations which arise form the old loan and make it more suitable to your need and your pocket and many more.

Every coin has two sides, similarly, Refinancing has its own advantages and its disadvantages and these should be understood clearly so that one is not cheated or duped under any circumstances.

Reasons for refinancing

There exists cut throat competition in the market, no matter which field of the economy we are discussing. This competition forces the companies, which are engaged in financing, to reduce the rate of the mortgage, both for its survival and growth.

This kind of competition in a way benefits the consumer, who can take the utmost advantage of the arte of interest. For example when the initial mortgage of property is done by a person he may be coughing up say an amount X as the interest.

Soon he realizes that there is a different company in the market which is ready to give the same amount of loan at interest rate Y which is lower than X. the preference is automatically shifted to Y , as he reduces his interest liability and saves on money.

Hence he decides on refinancing his loan from the initial company to the new one. By refinancing, one can also have some tax benefits as per the tax laws of the country. For this, either the consumer has to have a clear idea of the tax laws or the counselor of the finance company will have to update him on it. If tax benefits are received by transferring the old loan to a new one refinancing is restored to.

Sometimes it so happens that a person is unable to repay the loan or the interest amount due to some financial or other strain.

To keep up to the promise made to the financial institution he has to resort to refinancing, where he takes a fresh loan to pay up the old amount and in some cases may get some extra amount of loan from the other or same company in some other scheme.

The most common example that one cite in this respect is that of credit cards. Often to pay the dues of one bill people buy new credit cards with higher or same credit limit to pay off the old dues. This also reduces their liability of interest payment, which is an added advantage. Refinancing enables a person to reduce the amount of his monthly payments.

This can be achieved in two ways, firstly when the interest rates are lower or secondly when the period of repayment is increased. If the financing is done on adjustable rate mortgage the risk is more, even if the initial loan payment amount is less.

This is because as the interest rate increase there are chances of the loan amount to also rise, which is risky. So to reduce the risk, people want to refinance to shift to fixed rate mortgage and reduce the risk factor. These are the basic reason as to why people resort to refinancing.

As discussed refinancing has its advantages but there simultaneously exists the disadvantages. By taking another loan to settle off the last loan claim does not free you form the liability. In fact, it may result in a vicious circle of loan which one may never be able to cross or end.

Refinancing should also be avoided if the loan ahs been repaid for the major portion of the time period. For example if out of 10 years 8 years repayment have been done , then to extend the loan for another period of time through refinancing will only increase the cost burden of the borrower in the long run.

If your credit standing is not good and you have been a defaulter several times in paying an installment of the loan, you may not get a good amount of money on refinancing due to your bad credibility.

Refinancing results in more expenditure on the part of the borrower as he gets an extra flow of cash and as a result all his short term liabilities are transferred to long term ones, resulting in high costs without realization.

Refinancing is definitely a good scheme, but the pros and cons of it should be measured. Do not get lured by the sweet talk of the agents whose jobs are to just meet their targets, by getting more customers, and getting their share of extra incentives. Be smart, and reason out as to why you are opting for refinancing rather than just doing it blindly.