Consolidation debt finance home refinance
People take smaller debts from different sources. Because the debts are small, the lender does not stipulate any security. However, such small amount lenders often charge very high interest rates. An example of this is the credit card loan.
Small loans are also difficult to keep a track of. Many such loans may mean missing out on payment of one or two, inadvertently.
These smaller loans, being unsecured loans, are generally given on condition that if any installments are outstanding, interest will be calculated on them also in the following month. Effectively, this compounds the interest, which is already pegged at a very high level. Inability to pay up these loans may lead a borrower to bankruptcy court, and spoil the credit score as well. Therefore, it is imperative that such loans are repaid as fast as possible.
One method available to a borrower who already has a house is to pull out home equity, as loan.
Banks, financial institutions, credit unions, and many private lenders offer such home refinance products.
The term of such home refinance loans is lesser. However, it depends upon the borrowers age, annual income, and other factors, such as total loans outstanding etc.
Interest rates are also slightly higher, though nowhere near those on borrowings from sources such as credit cards.
These home refinance loans are repayable in monthly installments, which are far more affordable, because of the long tenure and lower interest rates.
The interest paid on these home refinance loans may also be set off against income earned during the year, thereby lowering the taxable income.
Lenders are usually willing to give such home refinance loans to the borrowers, who have established a decent home loan repayment record. Such lenders evaluate the borrowings of the borrower, and estimate how much he or she can genuinely pay. If the borrower is truly unable to repay the unsecured loans, then there is every possibility of the secured loan being in jeopardy sooner or later, with unsecured creditors approaching bankruptcy courts. While the underlying security does cover both the principal and interest
of home loans, the process of recovery is cumbersome.
Lenders have another reason to extend such home refinance. Value of real estate appreciates over time. And the borrower would have repaid some part of the home loan over this period. Effectively, the ratio of the amount being given under home refinance and home loan balance is much less, when compared to the prescribed norms.
Therefore, lenders extend home refinance for consolidation of debts, if
- They are convinced that the value of home has appreciated adequately to cover this additional amount and interests thereon
- The borrower meets the income criterion for giving the loan
- By giving such home refinance, the borrower can be made solvent
- The borrower has been regular in repaying the home loan
The borrower on the other hand stands to gain because
- By consolidating the debts, he is able to monitor the monthly outflow without much problem
- The installments are affordable because of lower interest rates, and longer repayment period
- No additional security is required to be provided to the lender, because capital appreciation on the home already mortgaged to the lender is being borrowed. Consequently, loan-processing charges are much lower.
- The interest paid on this loan is deductible for income tax purposes
Even so, the borrower must study all the terms and conditions of home refinance. At times, the borrower may have to pay some prepayment charges. These add to interest costs. Borrower must also shop around for different home refinance rates available in the market, so that he is in a better position to negotiate the interest rates.
Other Articles
