What is Refinance?

Refinance is a term that describes a process in which a debt obligation that already exists is replaced with another debt obligation. This is quite prevalent in Canada. Such a debt obligation is then formulated with different terms and conditions. The most common example of refinancing is the one done for a mortgage, especially home mortgage. The refinancing procedure is generally taken up in situations wherein the rate of interest or rates of costs have to be reduced. In such cases the debt is replaced by one that relatively imposes lower interests and costs. Sometimes refinance is also done with debt obligation replacements when the consumer or the customer wishes to obtain an extension in the time for repayment or when the consumer wants to reduce the periodic or regular obligations of payment that which accompanies a long term loans. Refinancing is done in conditions wherein the consumer requires paying off other debts and in cases where a reduction in risk by replacing a variable rate loan to fixed rate loan.
In Canada Refinancing is also done in order to pay off a dividend or to raise amount for investment. Refinancing can essentially change or modify the periodic payments which may be monthly or quarterly that is associated with a loan. This is done by either altering the rate of interest of the loan or by changing the term or period to maturity of the loan. The overall and total cost of borrowing may be reduced by several favorable conditions during the lending process. Refinancing thus helps in indirectly or directly improving the overall or the total inflow of cash.
Refinancing also finds a very important utility. This is, in effectively reducing the risk that is associated with any loan that currently exists. It is a fact that the rate of interests on loans with adjustable rates often change and deviate that is, they either go up or come down depending on the fluctuations of the indices that are used to compute them. Hence this naturally involves a risk. By implementing refinance on these adjustable rate loans and converting these to fixed rate loans, the risk of a drastic rise in rate of interest is sufficiently reduced. This consequently guarantees a steady rate of interest over a period of time. This kind of a refinancing flexibility is charged a nominal fee. With reference to personal loans and finance, the system of refinance provides assistance to consumers in repayment of high rate of interest loan like the credit card debt. This again ultimately reduces the cost of borrowing to lenders. The borrowing cost can be aligned with collateral security and worthiness of the general credit. There are also some disadvantages of this refinancing system. Even though the refinanced debts have small initial payments, the total cost of interest over loan that is for a life time period may turn out to be a large sum. This may lead to greater risks.

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