“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 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 to borrow more for consumer purchases (car, vacation, etc.) could significantly set you back.
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 a lower rate. You can do these provided rates have fallen enough to cover your prepayment penalty and the upfront costs of initiating a new loan (like processing fee, administrative fee, etc.)
- Suppose you plan to sell the home during the tenure of the original loan. In that case, you will need to terminate the loan borrowing the remaining principal amount against the home equity or from the potential buyer.
- Change from a Fixed-rate loan to a larger flexible Floating rate / Hybrid goods. You may need to switch from a floating rate loan to a fixed-rate loan if interest rates begin to move up.
- You can reduce your monthly instalment amounts by extending the tenure of the new credit. To increase your monthly cash flows, you can prepay an actual loan with five years to go by using a new 15-year loan for the outstanding principal amount.