Details to be analyzed before taking a decision to refinance
The idea of taking a loan at lower interest rate to pay off the previous one and thus saving some amount every month seems to be a very lucrative option. But certain factors need to be kept in mind so as to make a prudent decision.
Difference in interest rates
Interest rate difference is the first factor that needs to be considered before opting for refinance. A person has to make a detailed calculation of his loan installments with respect to the original rate of interest as well as the interest charged by the refinance lender. The difference in interest rates between the previous and the refinance lender has to be quite large. A small difference in the interest rates might not benefit the individual due to other fees and penalties associated with refinancing.
Fees and charges associated with the collateral to be deposited with the lender
A person has to keep some property of his as collateral with the refinance lender whenever he chooses to refinance his home loan. There are many kinds of fees associated with this collateral like fee paid to the person who would be assessing the current value of the property, fee for searching the land records, etc.. One should always take these fee amounts into consideration before taking a decision to refinance. If these fees amount to a huge figure then the benefits of refinance would be nullified by them.
Prepayment penalty refers to penalty charged by the lender if the loan is repaid before the stipulated time. When an individual chooses to refinance his loan, considering the lower interest rates he is actually paying off his loan before the stipulated time. If the original lender charges a prepayment penalty and the prepayment penalty amount is large then all the benefits earned by taking a refinance would be nullified. So if there are no potential gains then refinancing turns out to be useless.