Guest post: Refinancing your home loan to invest: Beware of the risks

 US-PDGov

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 

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.