One of the most commonly occurring phenomena is fluctuation in the interest rate environment. Due to the volatile economic factors, the interest rates offered on loans tend to change frequently. Very often, one is caught in a situation where they come across the information that after they had borrowed a loan and signed the agreement for a particular interest, the interest rate for the same loan type falls due to the market fluctuations. That seems unfair because someone can get the same loan at a lower interest rate, and the other needs to pay more. Keeping in the eye the high volatility of the interest market, refinancing was introduced. Refinancing is generally considered when there is a change in the interest rate or a required change in the payment schedule or other related factors and needs the other party’s approval.
Refinancing and its working:-
Refinancing refers to the process in which the existing agreement for the credit obligations can be replaced with a new agreement under the mutual acceptance of both the parties involved. This generally happens in the case of loans and mortgages. In the refinancing process, the borrower can seek to make alterations to the credit obligation agreement in terms of change in the interest rate, payment schedule and other related terminology as specified in the agreement contract. For this, the borrower needs the lender’s acceptance, and if the lender permits the changes sought, then a new agreement is issued with the necessary amendments stated. This feature generally supports the borrowers to make room for certain estimated savings on debt payment. Mortgage refinancing services, student loan refinancing services, car loan refinancing services are the most commonly available types when their interest rate goes down. The refinance generally takes place when there is a shift in economic condition, required change in loan duration, seeking to reduce the payment over the loan time or may be due to an improvement in the credit plans due to improved long term financing schemes or debt consolidation. Market fluctuation, Competition, economic cycle and national monetary policy are major factors that influence both revolving credit cards and non-revolving loans. A positive change in interest rate is unfavorable for the debtor and vice versa.
Refinancing break-even point:-
The refinancing break-even point is reached when the monthly savings exceed the cost of the new loan. Before moving on to how long one requires to reach the break-even point, the first topic to be discussed is what does the term closing cost include? The closing cost generally refers to the expenses incurred apart from the property’s purchase price while closing the real estate deal. The closing cost is generally around 4 to 6% of the principal amount and includes various fees like appraisal cost, tax service fee, title fee, origination fee, credit report fee etc. the refinancing break-even point can be estimated by the borrower himself, just by dividing the closing cost of the previous loan plus the new loan cost that is the total loan costs by the monthly savings or accumulated savings. The quotient obtained is the time to reach the break-even point, which is in months and years. After that, the monthly savings need not be used and is safe or can be used for principal repayment and save a lot more money which would rather be paid as interest on debts.
- For example:- if the loan cost is $4000 and the monthly savings is $400 then the Months required for break-even point= Loan costs/ monthly savings= $4000/ 400= 10 months. The details for the best online mortgage can be found through various websites.
Refinancing to shorter-term is also a great option as it would be an opportunity to earn big savings beyond the break-even point. The refinancing to shorter-term won’t mean less monthly payment, but it would result in a great deal of savings in total interest payment and result in future profit.