What is loan refinancing

2024 Author: Howard Calhoun | [email protected]. Last modified: 2023-12-17 10:16

Sometimes circumstances develop in such a way that the borrower cannot fully make payments on loan obligations. Salvation in this difficult situation can be refinancing the loan. It should be noted that such a banking service is not available to everyone. Only trustworthy clients, that is, those with an impeccable credit history, can take advantage of it. To do this, they should not have delays in making monthly payments. In addition, bank employees will pay close attention to the level of income. Sufficient is the financial condition of the client, which is able to cover the costs of two credit programs at once. It is necessary to say a few words about what loan refinancing is.

The essence of this banking service is as follows: a financial institution issues new borrowed funds to the client with a smaller monthly payment, but for a longer period. Having received the necessary amount, he repays the previously taken loan. It is noteworthy that you can resort to the refinancing service for any type of lending, be it a consumer loan, car loans or mortgages.

Often, borrowers seek to refinance a previously taken mortgagea loan, and this is logical, because such a banking product is issued for a rather long period, during which interest rates may change downwards. Before making such a decision, it is advisable to consider that this procedure may entail the following costs:

- commission to the bank for early repayment of the loan (up to 5%);

- commission for opening and maintaining an account, conclusion of an agreement and others;

- property valuation;

- payment for notary services for the execution of the contract;

- and others.

In general, the procedure for refinancing a mortgage loan is somewhat complicated. Banking institutions most often refuse to provide such a program for this particular type of lending. This trend is easily explained, because in this case, financial institutions for a certain period of time lose the ability to exercise control over collateral, resulting in the risk of re-registration of real estate to a non-banking institution.

Thus, the refinancing of the loan in the above example is one of the most difficult procedures, and, accordingly, the requirements for borrowers are becoming tougher. For this reason, only large banks provide their customers with loan refinancing, Sberbank, for example.

Some borrowers are at a disadvantage by taking on a new loan. This is because consumers often value the benefitsof one or another banking product solely in terms of the interest rate. This is wrong, because a variety of "pitfalls" can be hidden behind a temptingly low rate. Lending experts note that refinancing can become profitable only if the interest rate on the proposed product is at least 2% lower.