Refinancing is the availment of a fresh loan for the purpose of liquidating an existing debt obligation. Thus, an essential characteristic of refinancing is that the terms of the new loan must be significantly advantageous compared to those of the existing loan.
Reasons for Refinancing
Borrowers choose to refinance their loans to:
- reduce their monthly commitments by negotiating a reduced rate of interest;
- transit from a floating rate regime to a fixed rate arrangement or vice-versa;
- extend or shorten the period for repayment of the loan;
- improve the cash availability for alternate deployment;
- use the refinance to substitute high cost, unsecured debt such as credit card outstanding;
- consolidate existing outstanding borrowings;
- arrange for a cash out and retain the extra cash.
Precautions
- The rate of interest may look attractive but make sure that overall interest outgo over the life of the loan is lower than it is for the existing loan. A mere offer of a lower rate of interest may not be the whole story;
- Understand the fine print and ensure that, even after accounting for the all-in cost of refinancing, it is still a worthwhile proposition. Take into account the upfront fee, mortgage charges, inspection costs, prepayment charges of the existing lender, etc.
