What is Refinancing
Refinancing is the term used to describe the action of taking a loan out in order to pay for a previous loan. For example, sometimes homeowners take out loans for refinancing mortgage payments in order to get a better interest rate. In addition, a person may take out a second mortgage which is also considered refinancing in order to make improvements to the home. This type of financing is among the most common forms and it is a practice which is performed regularly in the world of real property investments. Following are some methods of refinancing that people use to help themselves financially.
Home Refinancing
Refinancing your home is often necessary if you plan to add an additional room, build a swimming pool, remodel or renovate a portion of the home, or if you just get a little behind on your bills. A refinancing calculator is generally used to determine what you may incur in terms of interest rates you may be looking at. In addition, some people take out second mortgages which are another form of refinancing. With a second mortgage you will not pay off the first mortgage in most cases, you will just wind up making two mortgage payments each month. This is a very bad move if your financial situation is already poor. Second mortgages should only be taken out as a last resort unless there is a very good financial plan in place.
Real Estate Refinancing
There are others types of property that people us to refinance aside from just their personal homes. Commercial properties such as shopping centers, apartment buildings, warehouses and any other type of real property can be refinanced to obtain extra funding for anything from building an extra parking area, to replacing an old roof. The interest rates will vary depending on the type of refinancing mortgage is taken out. Private lenders tend to offer much higher interest rates, however, loan closings and approvals are usually much faster without all the red tape involved in bank loans. This is especially true if the investor that is looking for a loan does not have everything needed to gain an approval through a bank.
Debt Refinancing
The term debt refinancing simply means refinancing something of value such as a home or business in order to receive enough money to pay off existing debts. This is a very good tool for people who have an over abundance of bills coming in each month to consolidate them into one neat payment. The best part of refinancing to consolidate debts is that in most cases a lower interest rate may be given on the new loan which may wind up saving a significant amount of money in the long run.
The only downside is that when you refinance anything you are actually extending the life of the loan. This means that if a person had another 10 years of mortgage payments on his/her home before it would be owned free and clear, taking out a new mortgage that would be amortized over a 30 year period would bring him/her right back to square one in terms of owing on the home. The same can be said for refinancing a real property that is used for investment purposes. It is also very important when refinancing to ask about pre-payment clauses to see if there will be penalties if you should decide to pay the loan off early. In some cases there are very steep penalties put in place to discourage people from paying off loans early.