If you have already taken a mortgage on your home and find that the interest rate in the market has reduced, you can apply to refinance your existing loan. If you opt for refinancing your loan at a lower interest rate, you can save more money on the interest balances.

What is refinancing?

You can opt for refinancing, if you want to pay off some other loan, which is secured against the same property or assets. You can also refinance a loan, if you find that the new loan will have a more favorable interest rate than that of your existing loan.

When should you refinance your loan?

You can refinance your existing loan for the reasons mentioned below:
You have an excellent credit score and have never been a defaulter.

The interest rate on your existing mortgage is at least 2% higher than the current interest rate in the market.

You will have to make a lower monthly payment if you consolidate all your outstanding loans and credits.

It will help you to reduce the total loan term.

What are the types of refinancing options?

You can refinance your existing loan by obtaining the types of loans mentioned below:
Fixed rate mortgage: In this type of loan, your interest rate will remain fixed for the full loan term. You will have to make a fixed monthly payment, so that, you can plan your budget accordingly. It does not allow you to make extra payments and redraw on additional funds. It is less flexible and has fewer features.

Adjustable rate mortgage: In this type of loan, the interest rate fluctuates throughout the loan term. For an initial period the interest rate remains fixed, after that it changes according to the market index. The initial fixed interest rate is lower than that of a fixed rate loan.

Balloon home loan: In this type, the interest rate is fixed for a short period of time usually, 7 to 10 years. Interest rate is as low as that of an adjustable rate. At the end of the loan term you have to repay the loan in a lump sum.

Cash out refinance: If you have multiple debts you can take a larger mortgage to pay off all your debts, insurance premiums, home improvements, etc.

What are the benefits of refinancing a loan?

The advantages of opting for a refinance are:

Lower monthly payment: As with the new loan your interest rate will be low, your monthly payment will also be lowered.

Reduced amortization period: As the new interest rate will be lower than that of your old loan, you can shorten the loan term by paying more towards the monthly mortgage payment.

Eliminate PMI: With the new loan you can make 20% down payment on your home and can avoid paying the private mortgage insurance.

Reduced interest: If you go for a refinance, you will have a lower interest rate, thus, your monthly payment will be lowered and you can save more money.

Shorter loan term: As your monthly payment will be lower, you can make extra payment in addition to the minimum payment and can repay your loan faster.

You should be fully aware of the terms and conditions of the new loan, before you refinance your loan. A proper refinancing can be greatly beneficial to you, as it will modify the loan term and reduce your monthly payment.