When interest rates fall, as they have recently, most homeowners want to refinance their current debt. Although it may cut your loan costs and hasten debt payback, refinancing is not always the best choice. Refinancing may cost more than it saves you if all fees aren’t taken into consideration.
What is a home loan refinance and how does it work?
Transferring an existing home loan from one lender to another is the process of a refinance. The method is really easy to follow. The borrower notifies the new lender of their desire to refinance their home loan. Your past-due payments to your old lender are settled by the new lender. The new lender, who provides you with better terms and conditions, is then to whom you continue making loan EMI payments.
It’s crucial to understand when to refinance your home loan and when NOT to.
When is it a good idea to refinance your home loan?
When there is a reduction in interest rate
The majority of home loan borrowers transfer their current loans from one lender to another for this primary reason. For instance, it makes sense to transfer your loan to another lender if you find one who provides lower interest rates in order to reduce the cost of interest and, subsequently, the EMI.
Most home loans have adjustable interest rates. Some lenders do not, however, reduce the home loan rates on their current loans as the general interest rate declines. As a result, you might find that other lenders offer you a better deal on your home loan. In some cases, you should refinance your home loan to reduce the overall cost of the loan.
When you want to switch from a fixed rate to a floating rate home loan
Home loan interest rates can either be fixed or floating. For the entire term of a home loan, the interest rate is fixed. The interest rate on home loans with floating rates, however, fluctuates in response to shifts in the overall health of the economy.
Home loan borrowers can opt for refinancing in the following scenarios
- If the current fixed interest rates are low yet you are stuck with a high floating rate loan
- If the current interest rates on a house loan with a floating rate are low but you are stuck with a high fixed-rate loan.
A borrower can refinance their house loan in either of these situations to lower their EMI and overall interest rates.
When you want to borrow more
Most lenders give borrowers who refinance their mortgage the option of topping up their current amount. Consider, for example, that you have an Rs. A forty lakh rupee apartment purchase. The balance is now only Rs. 30 lakhs after five years of EMI payments. Your apartment’s value has increased to Rs. 80 lakhs in the interim. In this scenario, in addition to the existing home loan of Rs. 30 lakhs, you can also acquire a top-up loan of up to Rs. 50 lakhs while switching his home loan to a different lender.
When you are unsatisfied with your lender’s service
If you don’t receive adequate service from your lender, you might want to think about refinancing your loan. Examples of situations where a lender doesn’t provide enough service include:
- Failure to issue loan statements on time
- Inconveniences paying your loan EMIs online
- Bad customer service
- Slow in reacting to changing interest rates, etc.
When there is a change in your financial position
Your ability to make your EMI payments may occasionally become a problem for you. As an alternative, you might want to increase your EMI payments and pay off the loan sooner if your financial situation has improved. Verify whether the lender will accede to requests for EMI changes in either of these circumstances. If so, you are free to continue taking out loans and making the higher EMI. You can choose to refinance your home loan with a different lender if the current one is inflexible if the lender is not.
Few points to keep in mind, before refinancing a home loan
- Refinancing a house loan early on in the repayment period is strongly advised if you intend to do so. It is not regarded as a smart idea to transfer the loan to a lender in the later years of loan repayment because you would have paid the majority of the interest component by then.
- Be aware of all transfer-related costs, such as processing fees, appraisal fees, and other expenses. The transfer must result in savings greater than the total costs incurred, or else it is not permitted.
- Keep in mind that the new lender would regard your home loan as a brand-new loan. You must therefore go through all the steps that you initially took with your current lender, such as property verification, etc.
- You must obtain authorization from your existing lender confirming that you will send your loan documentation to the new lender within the required timeframe.
- If you have irregular EMI payments, the new lender will not approve your request for a home loan refinance.
Optimize your home loan with a home loan refinance
Refinancing a home loan involves moving your outstanding loan balance to a new lender. It is quite helpful in enabling you to have better terms for your home loan than what you are currently offered.
However, you must take the transfer’s entire costs into account before choosing to refinance your loan. If the overall savings outweigh the transfer fee, you have the option of refinancing.