Investors, companies or people invest and purchase apartments and real estate leveraging credit in the form of mortgage. The financing provided for real estate deals is taken under certain conditions – interest rate, risk level, value of the property and other factors. In the real estate market, these conditions may change – property prices rise, interest rates change or repayment ability changes. In view of this condition, financial institutions offer loans that may differ from those available at the time of the initial purchase.
Under such variable conditions, it is possible to reorganize the debt or refinance it – either by repayment of the old debt or by obtaining different financing terms which sometimes are better than the terms obtained originally. The changes in the market create opportunities to improve the terms of financing for real estate assets and increase profitability due to the reduction of financing expenses.
If the value of the property is higher than its value at the time of purchase, the property owner is in a position to get from the bank an additional credit – by taking advantage of the fact that the value of its collateral has increased. The amount of debt is not reduced but the terms for its financing may vary and be improved.
Why should you consider refinancing?
There are times when it is worthwhile to consider the Refinance process.
- Financial savings – Typically, the refinancing process saves interest expense. To do this, the property owner must find improved loan terms. A long-term loan or an increase in the amount of financing, may improve the terms of financing and interest rates.
- Reduced repayment payments – Sometimes, refinancing may help reduce monthly repayments for credit taken. When it comes to significant funding, the ability to reduce the return helps to control cash flow. The Refinance process resets the payback period and if the refund duration is increased, the refund amount is reduced. Together with a reduction in interest costs, the Refinance process has a significant impact on the amount of monthly repayment payments.
- Shortening the financing period – Sometimes the Refinance process is intended to shorten the funding process. Shortening the mortgage term from 20 years to 10 years may increase your monthly repayment but allows you to end your debt repayment in a shorter period of time.
- Reducing many types of financing – sometimes, for the purpose of purchasing an asset, several sources of financing and credit were used. The Refinance process allows you to repay the various loans and to consolidate the payment in a single financing channel with single repayment. This process is especially worthwhile when you can get better interest rates on the new loan.
- Change the loan type – Sometimes, as a result of a change in cash flow or changes in conditions, borrowers wish to exchange a variable interest loan for a balloon loan or fixed interest loan. The Refinance process allows you to do just that and to adjust the type of financing to the ability to repay and even to the changed market conditions.
- Repayment of loans with a fixed date – sometimes, balloon financing requires a refund on a certain date. There are not always resources to make this big refund. The Refinance process allows to replace the loan type and cover the existing liability.
What should be considered when Refinancing?
- Execution costs – the change process costs money and takes time. It is important to note that the conditions and performance of the Refinance are indeed worth the costs.
- Variable interest rates – extending the financing period may ease monthly cash flow but should consider that the cost of interest is greater over time. One must pay attention to the real cost of the new loan taken to calculate profitability.
- Loss of advantages of existing loans – Sometimes, in the Refinance process, buyers lose advantages in previous loans – early repayment without interest, more convenient payment terms or different deployment capabilities. It is important to consider these conditions in your account.