The Commission approves a €10 million loan for the EIB.
A mortgage is a loan for buying a property, and it comes with a fixed interest rate period, usually 10, 15, or 20 years. When this period ends, you have two options to manage the remaining debt: Prolongation or Refinancing.
Definitions
- Prolongation: Extending the term or due date of an existing loan without replacing it with a new one. Typically, you keep the same loan and lender but negotiate more time to repay.
- Refinancing: Paying off an existing loan with a new loan, ideally with better terms such as lower interest rates, lower monthly payments, or a different repayment period.
Benefits
Prolongation
- Can reduce monthly payments by extending the term
- Usually no change in interest rate or terms
- Generally simpler; renegotiate terms with the same lender
- Usually minimal or no additional fees
Refinancing
- Can reduce monthly payments by lowering the interest rate or extending the term
- Possible to get a lower interest rate if credit or market conditions improved
- Can replace the loan with better rates, terms, or even cash out equity
Disadvantages
Prolongation
- Likely to increase overall interest because of a longer term
- May incur late fees or penalties if not properly negotiated
- Minimal impact on credit unless extension signals payment difficulty
- Depends on lender willingness to extend
Refinancing
- Can save on interest with a lower rate, but high upfront costs can offset savings
- Prepayment penalties on old loan; closing costs on new loan
- New credit inquiry; possible change in credit score
- Depends on creditworthiness, market rates, and approval of a new lender
When Each Is More Favorable
- Prolongation is more favorable if you primarily need immediate relief from high monthly payments or temporary financial hardship and want to avoid the cost and complexity of refinancing.
- Refinancing is more favorable if you can secure a lower interest rate, better loan terms, or need to adjust the loan beyond what your current lender offers, especially if your credit score has improved or market rates have decreased since your original loan.
Summary
- Choose prolongation if you need immediate relief from high monthly payments or temporary financial hardship and want to avoid the cost and complexity of refinancing.
- Choose refinancing if you can secure a lower interest rate, better loan terms, or need to adjust the loan beyond what your current lender offers, especially if your credit score has improved or market rates have decreased since your original loan.
- Always factor in possible prepayment penalties, closing costs, and your ability to meet new loan qualification criteria when considering refinancing.
Additional note: An alternative to prolongation and refinancing is mortgage recasting, where you make a lump-sum payment to reduce principal and then have your monthly payments recalculated without changing the loan terms. This can reduce payments and interest without the costs of refinancing.
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- In the financial industry, refinancing a mortgage can lead to reducing monthly payments by lowering the interest rate or extending the term, and it's more advantageous if you can secure better loan terms or need to adjust the loan beyond what your current lender offers, especially if your credit score has improved or market rates have decreased since your original loan.
- On the other hand, personal-finance strategies like prolongation can help reduce monthly payments by extending the term without replacing the loan, making it more favorable if you need immediate relief from high monthly payments or temporary financial hardship and want to avoid the cost and complexity of refinancing.
- It's crucial to be aware that, while both prolongation and refinancing have their benefits within the banking-and-insurance sector, they come with potential disadvantages, such as increased overall interest, additional fees, and impact on credit scores, which should be carefully considered before making a decision.
