What is loan refinancing and how does it work


What is loan refinancing? Loan refinancing is a time-consuming process and the borrower might suffer bigger risk and worsen conditions from the new loan than the original one, however there are also potential benefits to loan refinancing:

Loan refinancing is when the borrower replaces the original mortgage for an existing loan with a new one in order to obtain a better interest term (e.g. to reduce a monthly repayment amount), a lower interest rate. Under the financial difficulties circumstance, loan refinancing is used for the borrower to reduce or alter risk (change the type of loan, e.g. to switch to a fixed-rate loan), to consolidate other debts into one loan (pay off a loan that’s due) and to free up cash for a long term loan.

The disadvantages of loan refinancing are:

There will be transaction cost, as loan refinancing process can be expensive. Despite of obtaining better interest terms in refinancing, it is also very likely for the borrower to obtain a higher interest costs even the borrower might enjoy lower monthly payment but the benefits can be offset by a higher lifetime cost of borrowing[i].

The actual loan refinancing process works in the same way as when the borrower applied for the first mortgage: the new loan pays off the first loan and the second loan can be simply created by making a new mortgage and removing the original mortgage. Researches should be carried out by the borrower or his financial partner, based on the research result and the situation of the borrower, loan options can be made in order to proceed to the next stage: collection of required financial documents and submission of loan refinancing application according to the new mortgage.

In the United Kingdom, the basic essential financial documents for loan refinancing usually include: income from the previous year, most recent pay stub, tax returns from the last year, a list of all the debts and bankruptcy discharge paper (if any). More documents will be required up to the mortgage and other financial situation of the borrower.

For further information please visit our insolvency practitioners london´s website or send us an email to info@quabbala.com.

[i] The Balance