Refinancing your home loan, dangerous or smart?

Refinancing your home loan, dangerous or smart?

What does refinancing your home actually mean? Well refinancing a home loan can mean different things depending on the kind of home loan you have or even if you have a home loan. In this article we will check the various options you have with their specific pitfalls and advantages.

What does refinancing a home loan mean?

Refinancing a home loan involves getting a loan with your home as security or lien. This means that if you can’t pay your loans monthly repayments you will lose your home. This might sound scary. Because it is scary to lose your home, as you might have guessed that is the big con of these loans. The positive side is that because these loans generally are low risk to lenders if you’re smart you can find some good deals with your interest.

There are two ways of refinancing a home loan. You can a) Extend and existing home loan, using your equity as security or b) get a new loan on your already paid for home.

A. Refinancing your home by extending your existing home loan.

This is the most common path to refinancing. Maybe you have been paying your mortage or home loan for 5 years, the value of your home has increased, the equity of your home is quite substantial. For example, if you bought your home for 100,000$ you have paid for 10,000$ and the current market value of your home is 130,000$ then your equity is around 40,000$. Most banks and financial institutions would be happy to lend you 10 to 30 thousand dollars on the equity of your home. There are various ways of doing this, you can a) extend the tenure of your loan as you increase the capital borrowed or b) you keep the tenure the same and increase the capital, which will make your payments higher, but keep the interest paid down.

B. Refinancing your home by getting a loan with your “paid for” home as security.

This form of loan is even easier to get with banks and financial institutions as it is a very low risk loan for them. The amount borrowed is generally very low compared with the value of the home so Banks and financial institutions are happy to lend to you. After all if you don’t keep up with your payments, they can a) push up the interest for the installments you don’t pay and b) Sell your home as lien for your loan. The advantega as we mentioned above is that because these loans are so safe for banks and financial institutions that provide home loans and refinancing packages, you can squeeze some good interest rate deals out of them.

These loans are often used to re-invest in the property by remodelling or buying adding an asset to the property, like a swimming pool, jacuzzie, etc… As always make sure you can afford the payments after refinancing your home as you WILL loose your home if you do not keep up with payments.