How does Refinance Work?
Refinancing is a financial strategy that gives a way to a borrower to change the terms of the loan and take benefit of the change in the rate of interest of the loans. The process of refinancing can vary depending on the type of loan being refinanced. The process involves the following:
1. Determining the Current Situation: Before taking any decision regarding the refinancing of the loan, a borrower must assess the current situation of the loan and his financial goals. If the financial situation of the borrower does not meet his overall goal and the loan terms are one of the reasons then he may opt for refinancing.
2. Look for Opportunities: After determining the current financial situation, the borrower should look for options and offers that might benefit him. This involves comparing the interest rates, fees, and other terms of different banks or financial institutions to find the most favourable refinancing offers.
3. Raising New Loan: Borrower raises a new loan. This involves the paperwork and payment of the cost of raising the loan. The borrower will choose a new loan that will be more beneficial than the existing one in terms of interest rates and conditions of the loan.
4. Paying off the Debts: The funds raised through new loans are used to pay off the existing debts whether it be a principal amount or the interest on the loan or penalty. Sometimes, the additional funds are used by the borrowers to expand the business or to write off other expenses.
5. Payment of New Loan: The previous loan gets paid off with the funds of the new loan but the borrower needs to start the monthly payment of the new loan so raised according to the agreed terms.