What are Home Refinance Loans?
Refinancing refers to the practice of availing a new loan instead of a previously taken one. Most customers who undertake refinancing do so to get a better term and rate of interest than offered by their current mortgage. The second mortgage can be taken out once the first has been repaid. Customers who have no problems with their credit history can go for refinancing as it can help them in converting a loan with variable rates of interest to one with a fixed rate, thus lowering the rate of interest and monthly payments applicable to them. Refinancing, however, can be a risky option for customers whose credit history is poor or if they’re in too much debt.
Benefits of Home Refinance Loans
- Lower rate of interest
- Longer tenor
- A chance to improve your credit rating
- Reduced monthly payments
- Increased savings
Eligibility Criteria for a Home Refinance Loan
A home refinance loan can be availed by customer once the bank has carried out its checks to ensure that you qualify for the loan. The appraisal of the home is the first step taken by the bank when determining whether or not a customer is eligible for a home refinance loan, following which the lender ascertains what percentage of the appraisal it is comfortable with granting to the customer. After this, the balance remaining on the first loan is subtracted, after which the original loan is paid off using that money and the remaining balance is sanctioned to the customer.
Risks involved with Home Refinance Loans
The biggest risk of taking out a home refinancing loan is the potential of incurring penalties due to being unable to pay off the original mortgage. Most mortgage contract make a provision wherein the lender has the option to charge the customer a fee when they take a home refinance loan – fees that can extend into tens of thousands of dirhams. Customers are expected to ensure that the refinance will cover the penalty before they finalise the refinancing contract.
Customers will also have to beware of extra fees before they finalise their refinance contracts. These fees include payments made to attorneys to make sure that the customer is receiving the best possible deal. Attorneys also charge fees for filling out paperwork. Customers are also obliged to pay bank fees. However, these bank fees can be avoided or counteracted if customers take enough time to look around and find free refinancing or low-fee refinancing.
The best time to go for a Home Refinance Loan
Most lenders and banks require customers to have gone along with their first mortgage for at least a year before they consider a refinance loan. Though every lender offers different terms, the borrower is expected to consult the lender and understand all the details and restrictions. Taking a refinance loan from the same lender who sanctioned the original loan makes good sense for customers as the lender will not need a new property appraisal, title search, etc. Most lenders tend to offer a better rate to customers who come back to them for a refinance loan, making it easier for a customer to attain better terms and a better rate of interest when taking out a home refinance loan.