Types Of Mortgage Refinancing
First and foremost is the Home refinancing. The loan amount under this category is high and reduction in interest rates has significant effect on the finances of the borrower.
Mortgage refinancing suits this loan best, in view of the fact that there is bound to be appreciation in the value of the property, which increases the prospect of loan worthiness. This deal is beneficial for both the lender and the borrower.
Apart from the above, loans from credit card companies, which command abnormal rates of interest beyond the credit period, need to be refinanced by means of mortgage. Though the loan amounts are not as large as Home loans, the steep interest rates clamour for a major chunk in the income of the borrower.
With the rise in Home equity, the concept of which have been discussed separately, which refers to total eligibility of loan against the concerned property and the loan amount taken initially or the contemplated loan amount for repayment of earlier mortgage. Say, for example, a property is worth Rs.20.00 lakhs. The eligible loan amount, assuming the repaying capacity is adequate, is 90% i.e., Rs.18.00 lakhs. Loan is taken for Rs.18.00 for a term of 20 years and after a period of 5 years the outstanding is around Rs.15.00 lakhs. Now, the market value of the property would have appreciated to Rs.50.00 lakhs. The loan eligibility will be Rs.45.00 lakhs. For mortgage refinancing of the home loan, the loan amount required will be Rs.15.00 lakhs and the Rs.30.00 lakhs eligible loan amount is termed as Home equity. This can be utilized to pay off other loans that command very high interest rates. Of course, Banks keep a tab on this part of the loan and charge a nominally higher interest rate.
Next in line comes, other unsecured loan like personal loan from Banks, moneylenders, etc. Getting personal loan or a loan from private, unorganised moneylenders is child's play. In fact, with the accumulation of deposits with Banks, they are forced to convert them into productive investments. The credit department of these Banks use various marketing techniques like placing ad in various forms of media and telemarketing get prospective clients. The only criterion adopted for lending is repaying capacity.
However, it goes without saying that the interest rate is significantly higher than the mortgaged loan products. Also, they are lent with a maximum repaying period of 3 years. As such, the high interest rate and short repayment period make the monthly EMI to the on the higher side. This will have an telling impact on the monthly income. Besides, it is also to be noted that personal loans are mostly taken to meet some unavoidable expenditures, and hence the cost of capital cannot be set off against any other inflow of funds or there is no appreciation as in the case of home loans. Hence, personal loans require to be refinanced to get a better deal. It is pertinent to mention that various types of loans can be brought under one mortgage refinanced loan, which enables one to plan and schedule the repayments. The advantage of lower interest rate and favourable terms of loans in comparison with to other types of loans, need to be borne in mind.