Refinance

Refinance refers to paying off an existing loan by taking another loan at lower interest rate. The interest rate on the loan basically governs the monthly payments to be made towards the payment of the loan, so a higher the interest rate translates to a higher monthly payment. The interest rate on a loan can either be fixed or variable. If the rate of interest is fixed then the monthly payments will remain constant for the duration of the loan and is determined at the time of closing of the loan. If the interest is variable then the monthly payments will depend on the interest rate for a particular month. The changing interest rate is directed by the current market conditions. So if the market causes the interest rates to go up it will cause monthly payments to be higher.

People turn to refinancing for one of the following reasons:
1. To switch to a loan with lower interest rate
2. To lengthen the duration of the loan
3. To pay off other debts
4. To switch from a variable interest rate loan to a fixed long term loan
5. To raise money for investment or payment of dividend

The decision to refinance a particular debt depends on a lot of factors. Many fixed term loans have a penalty associated with them if the loan is paid off earlier. Also refinancing a debt has a lot of fees for processing the loan sanctioning itself. So the decision to refinance a debt should be made only if the savings due to the lower interest rate on the new loan will be more than all the overhead costs incurred in closing of the earlier loan and obtaining the new loan.

Another thing to consider while refinancing is the percentage of upfront payment to be made. Depending upon initial payment made the rate of interest may be lower on the refinanced loan. So an optimal balance is to be chosen between the percentage of upfront payment and paying lower monthly premiums. It is important to note that the lower interest rate is available on refinanced debt only if the borrower has strong credit history.