Why and When Should You Consider Home Loan Refinance?
A home loan is a pretty big commitment for everyone that takes away a chunk of your monthly earnings for a long period of time. If an opportunity comes up where you can save on your loan repayment, it makes perfect sense to save grab it. The answer lies in Home Loan Refinance.
Basically, refinancing a housing loan means switching from an existing lender to a different lender with additional benefits. One of the many benefits can be – if the new lender is offering higher loan amount at a lower rate of interest, permits switching from fixed to floating rates, allows reduction in loan tenure, or on EMI and is offering better terms and service.
If you are receiving a progressive option for a better house loan, then you should consider it. Instead of getting stuck with your existing loan, you can consider refinancing only if there is a significant advantage of doing so.
How is Home Loan Refinancing Done?
The simplest way of opting for refinancing is by asking the new lender to settle the dues with the current lender. Once you have chosen a new lender who is offering you better loan terms and conditions, you can proceed with the formalities and documentation. You can then start paying your EMIs to the new lender.
When Should You Consider Opting for Home Loan Refinance?
There are various situations during which you can consider housing loan refinancing. You can go through the conditions mentioned below to get a better deal from refinancing.
- Lower rate of interest
You obviously wouldn’t want to pay a higher interest rate after making a switch. Go for it if you are being offered a lower interest rate on your outstanding loan amount.
- Switch from fixed rate to floating rate
If you opted for a fixed rate at the time of availing a home loan, then you can consider switching for a floating rate where the interest rates keep declining once you have started paying your EMIs.
Floating rates help you save a lot of money from being given away to the lender as interest. The recent changes made by the RBI in cutting repo rates (i.e. lending rates) all banks that follow this benchmark have been directed to reduce loan rates.
If your current lender is not offering you a floating rate option, you can refinance your loan by switching to another lender who is offering you a floating interest rate.
- Lowering loan tenure
If you opted for a longer tenure initially and if your financial position has changed over time, then you can consider lowering the tenure of your home loan. If your current lender doesn’t offer you this provision, then you can consider making a switch.
- When you want to lower the EMI amount
If your financial circumstances have prompted you to consider lower EMI commitments, then you can switch for longer tenure with reduced EMI amount with a new lender.
- When you want to avail better service and favourable terms
After disbursement of the loan amount, you may realize that your lender’s standards and service quality is below par. If you feel inconvenience in repaying the loan amount, then you can make a switch to another lender who is offering a stellar service.
- When you intend to borrow more
After taking a loan, you may feel that your funding needs have increased due to the changes in specifications and designs that are made to your house. Refinancing can help you in such cases so that you can use additional funds to realize your dreams.
Let us consider a case of Mr. Sharma considering refinancing. He originally borrowed a loan of ₹25 lakhs for 15 years repayment tenure with an interest rate of 9.5 percent. If he then receives an option from a new lender offering an interest rate of 8.5 percent, then he can save ₹273,114 by making a switch.
|Parameters||Existing lender||New lender|
|Original loan amount||₹25 lakhs||₹30 lakhs|
|Total Amount Payable||₹53,79,078||₹61,09,294|
From this above example, you can see that Mr. Sharma would be paying an additional interest of just around ₹2.3 lakh over the entire tenure and can still avail an additional ₹5 lakh of loan amount at a lower rate of interest.
Refinancing is a great option for individuals who have opted for a home loan. You can save a considerable amount of money by switching to a lender offering better loan terms and conditions as well as interest rates. You also get convenience in terms of superior customer service. You have to weigh the options presented to you with the existing lender to decide if refinancing would be of any benefit to you or not.