When Is Home Loan Refinancing A Good Idea?

By Dheeraj Kapoor | December 6, 2016

When Is Home Loan Refinancing A Good Idea?

The recent demonetisation drive has had many borrowers wondering whether the interest rates on loans will be slashed and if refinancing their loans is a good idea. Are you half-way through your existing Home Loan but now think that changing your Home Loan lender might be a good idea?

It’s time to think about Home Loan refinancing. Not sure what that means? Let’s give you the basics.

What is Home Loan refinancing?

Home Loan refinancing simply means applying for a new loan from a different lender in order to pay off an existing Home Loan.

Primary reasons for Home Loan refinancing

There are two important reasons why borrowers choose Home Loan refinancing. These are:

  • To benefit from a lower interest rate
  • To get a top-up on an existing Home Loan

But wait, there are many other reasons why choosing to refinance your Home Loan may prove to be beneficial to you. Here are five great ones.

  • Save on the interest component

This is one of the most common reasons for Home Loan refinancing. If a borrower is paying a higher interest rate on a Home Loan and he finds that another lender is offering a lower interest rate, he would consider refinancing his Home Loan and shifting to another lender. Ultimately, this will result in a decrease in his monthly EMI payments.

Additional Reading: Currency Demonetisation To Impact The Real Estate Sector

  • Shifting from a floating rate to a fixed rate of interest

You can also migrate your loan from a fixed rate of interest to a floating rate. It works both ways. If you are stuck with a floating interest rate and your lender is offering a fixed interest rate which is lower, you could consider it. With a fixed interest rate loan, the loan EMIs would be constant for a period of time.

You may need to incur some pre-closure charges if you decide to refinance your Home Loan, but this will be negligible in comparison to how much money you will save during the loan tenure.

  • Top-up loans

Apart from Home Loan refinancing, a borrower can also opt for a top-up loan for additional funding. You must remember that it is a good idea to apply for a top-up loan from a new lender only if you can get a lower interest rate. In case the interest rate is similar, it would be more sensible to approach your present lender for a top-up loan. If you do this, you will not need to pay the loan refinancing charges.

You stand a good chance of getting a top-up loan from your existing lender if your repayment history is good, and if the value of your property has appreciated over time.

Additional Reading: Home Loan Document Checklist

  • Are you unhappy with your lender’s customer service?

In case your present lender is slow to implement changes in interest rates, or does not offer good customer service, or does not provide regular loan statements, then you need to be on your guard. These are all red flags that you should watch out for before deciding to move to a new lender to refinance your Home Loan.

  • A bigger pay cheque

It goes without saying that any increase or decrease in your income would directly impact your loan repayment capacity. Assuming your monthly pay cheque has shrunk, then refinancing your Home Loan by choosing one with an extended tenure would be a good move. A longer tenure means lower EMIs.

(This also means paying higher interest in the long run. Just saying.)

But, if you’ve seen an increase in your finances since the commencement of your loan, you could safely consider reducing your loan tenure and increasing the EMI amount. This means your Home Loan will be repaid much faster.

Factors to consider when opting for Home Loan refinancing

  • It would be advisable to refinance your loan earlier in the loan tenure. Don’t wait too long. The sooner you choose to refinance the loan, the lower amount of interest you would have repaid.
  • Find out about the processing charges, valuation fees, and any other associated charges levied on a new loan.
  • Remember to get a statement from your present lender confirming that all loan related documents will be transferred to the new lender within a certain period of time.
  • Have your repayments on the loan been on track? Any repayment defaults or irregularities would make Home Loan refinancing rather difficult.

Additional Reading: Common Home Loan Problems Faced By First Time Borrowers

Wised up on Home Loans now? How about checking out some Home Loan offers?

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