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Monday, July 16, 2012

Refinancing your home loan to invest: Beware of the risks

Home loan refinancing
Refinancing sometimes lowers borrowing costs
By Allan Jones

Refinancing 


Refinancing a loan simply refers to getting a new loan on the same property to pay off the mortgage or for any other purpose such as investment or business. This second loan is decided upon the equity or value of your home; therefore, if you have a high home equity, you can acquire a large share of money to start a new business or refurnish your home, depending upon your needs.

Why should you refinance to invest 


Using the equity of your home to refinance can help you a great deal as it gives you the benefit of extra income as well as a source to repay your mortgage faster. Refinancing is a helpful resource in generating extra income and revenue for you, and can also fulfill any urgent needs of cash on your account.

Benefits of refinancing


You can use the second loan for a more fruitful investment and reap additional income, and open doors for business and trade ventures. The loan can also be used to pay off your mortgage faster and secure your property.

Risks involved in refinancing 


Although the lure of refinancing your home loan is pretty attractive, the benefits and charms come with strings attached. Therefore, it is advisable to learn the finer details and darker aspects of the refinancing package before taking a plunge.

1. Loss in the investment 

It is a gamble to invest your hard earned money in a business due to the constant fluctuating scenario of the market. While there are fair chances that your investment and business may flourish, any losses or setbacks you encounter in the course may make the pay back of your loan difficult and unaffordable. Therefore, make sure you have adequate savings in check before you opt to invest all your equity in an investment. Negative output can not only cost a high debt, but can also make you lose your home.

2. Share market risks 

An investment in the share market can also turn into a bane in the case rates decline suddenly. This can cause a major blow to your finances; therefore, keep this point in your mind when make an investment in the share market.

3. Rise in interest rates 

The income you generate from your investment should be higher than your interest rate in order to have a sound and smooth payback period. As refinancing increases your debt to twice, any rise in the interest rates can increase your monthly payment to a considerable degree.


When is the best time to refinance? 


Refinancing comes with its pros and cons, and the end decision lies in your hands whether it is suitable for your needs or not. However, generally the best time to refinance a loan is when the rates are lower and you have adequate savings intact to deal with a rate increase or complication in the future.

Allan has been blogging about financial news and tips for the last 3 years. Allan's favourite topics include the rising cost of debt, loan refinance strategy and retirement planning. Allan holds a BA in Business Administration with a specialty in banking.

17 comments:

  1. It is true that one can earn huge on tax benefit on home loan if you can understand the procedure properly. This money makes a huge difference in your total income for over years.

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  2. We all must be aware of the risks associated with the home loans. At the time of applying for loan, no one actually tries to look at the dark side of them.

    ReplyDelete
  3. ok here's my idea to Risks involved in refinancing.
    Cut regulations, and elminate a great number of useless government agencies, such as the department of education, interior, commerce, education. Cut taxes and government spending, and let the private sector get back to work.
    May be it would work.
    Finance Solution

    ReplyDelete
    Replies
    1. Cutting the Department of Commerce would mean we would have dramatically less statistical data with which to analyze market conditions. Kind of makes the economy like a fast moving train with no headlights! That said, it seems bureaucracy certainly isn't perfect and efficient spending is a work in progress.

      Delete
  4. If you consolidate smaller debts when refinancing into one long-term loan, additional interest may be paid over the longer term even though your total monthly payments may be reduced

    ReplyDelete
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  8. Hi Author,I really very happy after reading this post,This information is really helpful for me.Really very very thank you.

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  9. Part of investing like purchasing a house through mortgage home loans is risking. You will never going to own a house if you don't risk. That's the truth.

    ReplyDelete
  10. The value of the house you intend to buy will also be a factor because there will only be an amount that the bank will finance. Home loan rates will also be included in your analyses because this can have a big influence in the monthly amortizations you have to pay.

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  12. Is Re-Financing Always Worthwhile?

    This is a very important question which all homeowners should ask themselves both at the start and towards the end of the process of re-financing. The answer to this question can spur the homeowner to investigate re-financing further or convince the homeowner to table the thoughts of re-financing for the moment and concentrate on other aspect of owning a home.

    Establish Financial Goals

    This should be the first step in the process of determining whether or not re-financing is worthwhile. Without this step, a homeowner cannot accurate answer the question of the worth of re-financing because the homeowner may not fully understand his own financial goals. While financial goals may run the gamut from one extreme to another the most basic question to ask is whether the more significant goal is long term savings or increased monthly cash flow. This is important because re-financing can usually achieve these two goals.

    Do You Want to Save Money in the Long Run?

    Homeowners who establish a goal of saving money in the long run should consider re-financing options such as lower interest rates or shorter loan terms. Both of these options can considerably lower the amount of interest the homeowner is paying on the loan. This is significant because paying less interest will result in a greater cost savings.

    Consider an example where a homeowner has an existing debt of $100,000, an interest rate of 6.25% and a loan term of 30 years. Just by reducing the loan term to 15 years the homeowner can significantly decrease the amount which is paid in interest during the course of the loan. However, this option will also result in an increase in the monthly payments made by the homeowner. Therefore this type of re-financing option may only be available to those who have enough cash flow to compensate for the increase in monthly payments.

    Do You Want to Increase Your Monthly Cash Flow?

    Some homeowners may have a chosen goal of increasing their monthly cash flow. For these homeowners the overall cost savings may not be as important as having more money available to them each month. These homeowners might consider a re-financing option in which they are able to extend their loan terms. This means they will be repaying the existing debt over a longer period of time. The homeowner will pay more in interest in the long run but will achieve their goal of lower monthly payments and an increased cash flow.

    How Will Re-Financing Affect Tax Deductions?

    This is another serious consideration for homeowners who are interested in investigating the possibility of re-financing. The interest paid on a home loan is often tax deductible. A homeowner who re-finances in a manner which results in less interest being paid annually may adversely affect their tax strategy. The implications of this type of chance can be amplified for homeowners who were previously just below a significant tax break line. A significant decrease in the amount of interest paid will mean a significant decrease in the deduction the homeowner is allowed to take. This reduced deduction can put the homeowner in an entirely different tax bracket and could end up costing the homeowner money in the long run. For this reason, homeowners who are considering re-financing should have a tax preparation professional determine the ramifications re-financing will have on their tax return before a decision is made.http://cashanytime.net

    ReplyDelete
  13. Many homeowners have already discovered the benefits of cashing in on some of the shares in the home and paying existing debts. http://www.openmortgage.com

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  14. Expect to provide full documentation of income and assets with your mortgage application. Openmortgage

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  15. Thanks for highlighting the pros and cons of a conventional home loan. But a person can still refinance his existing VA mortgage loan to avail a number of advantages including reduced interest rate.

    ReplyDelete