About Refinancing A Loan
“Take Benefit Of Changing Interest Rates”
The old and arbitrary rule of thumb said that refinancing a loan only makes sense if you can lower your interest rate by at least two percentage points. For example, from 9% to 7%. But what really matters is how long it will take you to break even and whether you plan to stay in your home that long.
Remember that refinancing to reduce debt can be a smart move, but refinancing in order to borrow more for consumer purchases (car, vacation, etc.) could set you back significantly.
Refinancing a loan means repaying an existing home loan before its tenure with the money from a new loan taken under new terms and conditions. The following circumstances may trigger refinancing:
- Home loan interest rates in the economy have fallen and it makes sense to retire the old high cost fixed rate loan with a new fixed rate loan at the lower rate. You can do this provided rates have fallen enough to cover your prepayment penalty and the up front costs of initiating a new loan (like processing fee, administrative fee etc.)
- If you plan to sell the home during the tenure of the original loan you will need to terminate the loan borrowing the remaining principal amount against the home equity or from the potential buyer.
- Switch from a Fixed rate loan to a more flexible Floating rate / Hybrid product You may want to switch from a Floating rate loan to a fixed rate loan if interest rates start to move up.
- You can lower your monthly installment payments by extending the tenure of the new loan. In order to improve your monthly cash flows you can prepay an existing loan with 5 years to go by taking a new 15 year loan for the remaining principal amount.
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