Refinancing a Housing Loan or mortgage refinancing refers to switching your existing home loan to a different bank or through any financial institution. With smartly planned, it provides you with a number of benefits and let’s explore these in a little more detail:
Securing a Lower Interest Rate on your Loan
One of the best reasons to refinance is to lower the interest rate on your existing loan. Reducing your interest rate not only helps to save money, but it increases the rate at which you build equity in your home, and also reduces the size of your monthly payments.
Extending/Shortening the Loan’s Term
Refinancing helps you to alter your loan period, depending upon your needs. If you have any monthly cash flow issues, you can refinance and extend your loan period; this allows you to make lesser monthly installments.
You can also use refinancing to shorten your loan period. If your financial situation is better and you can make greater payments, then in such instances you can think about refinancing especially if your existing home loan package does not have flexible prepayment options.
Comparison between Adjustable-Rate and Fixed-Rate Mortgages
When shopping for a mortgage, one of the first decisions most borrowers will face is whether to take out a fixed or floating rate loan.
An ARM interest rate may rise or fall after the fixed period based on the market or index rates. It usually offers lower interest rates than fixed-rate mortgages, periodic adjustments often result in the increased rates higher than the available fixed-rate mortgage.
As the name suggests, a fixed rate loan has its interest rate fixed. Typically, fixed rate has interest rates that are higher than a floating rate loan. When the fixed-rate period ends, the monthly payment adjusts based on the type of loan you have.
This is possible when the market value of your property increases significantly. Refinancing enables you to cash out the added value of your property; you can use this cash for your personal requirements. But remember, cashing out is like taking an additional “top-up” loan amount; which enables you to repay the entire amount including the “top-up”.
Consolidating Home Loans
If you have a couple of loans running simultaneously then you will obviously face logistics issues like – keeping track of different loans, different payment dates, ensuring your bank account is adequately funded on loan deduction dates, etc. In such cases, you could use a refinancing plan to consolidate all your mortgage loans into one convenient loan package. Many homeowners refinance in order to consolidate their debt. Replacing a higher interest debt with a low-interest mortgage is a good idea.