Refinance loan: a double-edge weapon. How to handle interests and lenders requirements. possibilities of winning money, risks of losing it.

Why do someone should need refinancing a loan? Why might you be interested in doing that, with all the bureaucracy and errancy that are implied when getting to this type of loan? In what terms are we recommended to act? Generally, these particular issues are involved in any agreement that you want to arrange when wanting to get a refinance loan. Sometimes, analysis is needed, so as to study the risks and conveniences of having your loan refinanced.

As for the first question: people getting into refinance loans are generally those who have interest in reducing costs –by variations of market prices- , as long as increasing the amount of quotas implied in the loan. For instance, if you agree a certain amount to be renegotiated, you should reach an agreement on how the interest will vary in relation to the total amount of the loan and the variations occurred in the market. In other cases, periodic payments may be wanted to be more, so interest will probably raise, as for to make the quotas smaller. A refinance loan can also be applied when wanting to go from a fixed interest rate to a variable interest rate, or vice versa (whereas in the first case you are reducing risk, in the second one you are taking more risks). Refinancing also occur when you want to “raise cash for investment, consumption, or the payment of a dividend”, according to Wikipedia.

Is it really worthwhile to refinance your loan? Is it profitable, or recommended? Well it depends. Of course that running risks it’s on you, and if you want to have more possibilities taken with the market fluctuations, it’s obvious that you should go from fixed interest rate to variable interest rate. The question is if you will be mentally healthy enough to face difficult situations, as having refinance loans every now and then is not really the ideal situation –i.e if interest goes down, asking for refinance so you try to pay less, etc-. the general term of refinancing is that cash flow is improved, so what you have to pay also reduces in amount. But in harder conditions, the contrary may happen: that’s the risk your taking, and you are a hundred per cent responsible for that.

What kind of risks should you encounter, and what different situations are involved when thinking about getting a refinance loan? According to Wikipedia, “Most fixed-term debt contains penalty clauses (known as "call provisions") that are triggered by an early payment of the loan, either in its entirety or a specified portion. In addition, there are also closing and transaction fees typically associated with refinancing debt”.

A general drawback of these situations may result in fees being more expensive than any money that you might have saved beforehand. So this is another issue to take into consideration, as sometimes refinance loans can be tricky in this sense: more possibilities of having bills reduced but at the same time more chances to see your savings diminished.

Now there is one crucial aspect to consider, apart from all mentioned before: the requirements asked for by the lenders to enter into a refinance loan. In some cases, lenders require a previous payment, also called “upfront payment”. As stated in Wikipedia, "Typically, this amount is expressed in "points" (also sometimes called "premiums"), with each "point" being equivalent to 1% of the total loan amount. Therefore, if the refinance option selected involves paying three points, then the borrower will need to pay 3% of the total loan amount upfront”.

So how the general situation is when facing a refinance loan? On the one hand, you have to study all the different possibilities involved in the process, such as the interest imposed by the lenders, the conditions of the payments, the periods and amount of quotas that constitute the loan, and also the clauses applied to the agreement. On the other hand, you have to analyze your capability of paying back all the amount of the quotas, and your ability to save money and to face all your billings: credit cards, services, and so on. If you wont’ be fluid enough with liquid money to face the value of the debts and to pay the loan, then you will be named as a bad credit loaner. Of course, as here we are not talking about mortgage loan, your house wont’ be at stake, but anyway legal action by the bank can be applied. So you have to be very careful when taking a risk when refinancing your loan. Interest rates are also very valuable as a possibility of earning more money, but they can also a double-edge weapon, as you can end up ruined by tremblings of the market. Professional advice is also required, to give you general tips to understand in which terms you are going to enter the refinance loan, and if you should or should not do it. Sometimes, it’s a perfect time to do it, as for the situation of the market; but in other situations it’s just not like that. In those cases, having a professional adviser is of huge relevance, as they will have the impartial and objective information of your circumstances and the terms of the loan. Running risks can be very pleasant, but in other cases can be breathtaking and can give you very bad headaches. Tension, nerves, anxiety, are never good companions, and nevermore when talking about money: money should be happily approached, and never a motive for pain and sadness. Isn’t on you to choose. Some people prefer to do it, to go on refinancing their loans and risking their interests and the amount of the loan; other people, more passive and precatious , may not want to do that and will prefer to avoid tensions and have the loans settled at a fixed rate. Think it thoroughly and take into consideration that your savings are at stake.