Pitfalls of Refinance Deals


Refinance is a process that involves the replacement of a debt obligation with a new arrangement on different terms. Refinance arrangements may be the consequence of the expiry of an interest-only loan, or required for debt consolidation purposes. It could also be a strategic decision to take advantage of better terms. Borrowers with bad credit records should beware of refinancing offers with low payments under current mortgage rates. This is because a stretched-out credit loan or home loan can mean more spent on interest, and a slower rate of capital redemption.

A refinance mortgage therefore needs to be designed in ways that suit the borrower best, as opposed to the refinancing firm and broker. Banks make their money out of annual interest, and mortgage brokers earn a commission every year. This is why lenders and their agents encourage borrowers to go for the longest possible terms. An astute borrower always pays off their home refinance in the shortest time possible, and makes sure that the penalties for early settlement are minimal. Just imagine what it would be like to own a home that is fully paid for.

It is therefore of the utmost importance that borrowers take a holistic view when evaluating a refinance loan. Low monthly payments tied to lengthy loan periods can result in the cost of a home mortgage loan doubling although many borrowers never realise that this happens. An opportunity to refinance a loan should be seen as a way to bring debt down quickly, not spin it out. The refinancing mortgage rate is not the issue - the question really is, how much does the borrower actually pay?

An understanding of how refinance rates work can help a family obtain a more advantageous house loan. Keep these things in mind when considering refinance, and deal the cards your self.