When You Can Refinance a Loan or Mortgage

Refinancing allows you to take a new loan at a more favorable interest rate and also combine several loans into one. This way, you can save on the monthly payment amount and the total overpayment on a loan, mortgage, or credit card. Here we explain all the specifics of the procedure and when it is possible to refinance a loan or mortgage.

What is Refinancing?

Refinancing is taking out a new loan on market terms while simultaneously repaying one or more old loans. As a result, you can close all debts and pay off a single loan instead of multiple ones, and also save on overpayments and the monthly payment amount.

Which Loan Products Can Be Refinanced?

Most banks provide refinancing to cover many types of debt: consumer loans, loans secured by an apartment or car, auto loans, mortgages, credit cards, and microloans.

Within one refinancing transaction, it is possible to pay off several debts at once, for example, a secured loan, credit card debt, and a microloan. The main condition is that the approved bank amount is sufficient. Otherwise, it is only possible to repay one product.

Before applying for refinancing, it is recommended to contact the bank’s support to clarify all the details. This helps to understand whether your specific obligations can be repaid and how many loans can be covered by one refinancing.

When Is Refinancing Beneficial?

The amount of savings on overpayment depends not only on the difference between the current loan rate and the refinancing loan rate but also on the timing of refinancing. The closer to the end of the loan or mortgage term refinancing is done, the lower the benefit.

Why It Is Better to Refinance in the First Half of the Loan or Mortgage Term

Most loans are repaid with annuity payments, meaning the borrower pays a fixed monthly amount that includes interest. At the beginning of the term, most of the payment goes toward interest, so the principal decreases less than the total monthly payment. Therefore, the loan balance reduces slowly. In the first half of the term, the borrower pays more in interest than toward the principal, while in the second half, it is the opposite.

If refinancing occurs after the halfway point, most interest has already been paid, and refinancing will restart the cycle, requiring higher interest payments at the start again. The earlier refinancing is done, the more you can save on overpayments. Conversely, if refinancing is done late, for example, in the second half of the term, the savings may be minimal or even slightly higher if refinancing occurs just a few months before the loan ends. At this point, the borrower has already repaid most of the interest and is primarily paying the principal.

Bank Limitations on Refinancing

Some banks allow refinancing a new loan only after six months from repaying the previous loan. Also, not all debts can always be refinanced; for example, funds may not be provided to repay a credit card or microloan. Sometimes, it is only possible to repay a limited number of debts.