Home loans generally run for 20-30 years and half the EMI amount consists of home loan interest. Although interest on housing loans in India today is very competitive, even a small change in the interest rate can help a borrower save a lot in the long run. People who already have loans running can consider refinancing them to ease off their financial burden to some extent. So, what is home loan refinancing? Let us understand this in detail here.
What is Home Loan Refinancing?
Home loan refinancing is switching your ongoing housing loan from your existing lender to a new one, preferably offering better facilities and services. However, it is preferable to continue with the current lender until the difference in the rate of interest between the two becomes considerably high. The home loan eligibility calculator can help to know your eligibility for the loan and if a balance transfer would be feasible.
When Should You Refinance Your Loan?
Just like knowing what is home loan refinancing and how is it important, understanding when to refinance your home loan is also essential. Timing the refinancing could well make a big difference to your loan payments. Here are times when it makes perfect sense to refinance your home loan.
When There is Time Left on Your Loan – Refinancing the loan early in your loan tenor typically in the first half makes more sense. During this time, the EMIs mostly consist of the interest amount. Thus, a refinanced loan at a lower interest rate will lead to savings. However, if you are at the end of the loan repayment tenor, most of the interest is already paid and there is not much saving you may see even if you refinance the loan.
When You Get a Loan for Lower Interest – Often the main part of a home loan EMI is the interest portion. But, as a rule of thumb, if less than 75% of your loan repayment tenor is pending and the difference between the existing home loan interest rate and the prospective rate of interest is not more than 75 basis points, then it does make sense to go for a home loan balance transfer. You will benefit from refinancing the loan if the new rate of interest is at least 1% lower than the rate you have.
When Floating Interest Rates Fall – When you get to know that the interest rates on housing loans are expected to fall further in the future, you may want to shift from a fixed interest rate to a floating interest rate which moves with the market. This switch can help you save on interest costs when the rates fall. But keep in mind that these interest rates may also go up in the future and that not all vendors offer these rates to borrowers.
When Your Credit Score is High – An improvement in your credit score as well as income stability will allow you to access the best loan offers. With your credit score above 750, your creditworthiness increases in the eyes of the lender and they may lend you at a better interest rate than your current lender and help you save funds for future prepayment or investments. So, it is wise to switch lenders when you have a good credit score.
When the Cost of Refinancing is Justified – Refinancing any loan has a cost. You may need to pay a foreclosure charge to the old lender. Also, remember to go through the refinancing clause carefully as there may be hidden charges or terms and conditions which may increase the cost of refinancing it. Thus, when the projected savings from refinancing exceed the costs, you should consider refinancing the home loan.
When You Are Promised Better Services – Today, banks want to retain their existing home loan customers with added benefits apart from lower interest rates, top-up loans, and longer tenor loans. They offer facilities, such as zero balance accounts, flexi-deposits facilities, credit cards, locker facilities and current accounts, wherein you can keep your temporary surplus to save on interest costs. Switching to a new lender may make all these facilities chargeable. So, consider the feasibility of refinancing your home loan before doing it.
Now that we all know what is home loan refinancing, we can say that it is a great way to bring down interest outgo and channel the savings into other investment avenues. But is it the best decision? Your existing bank on seeing you leave may lastly offer you the rate at which you had thought of refinancing your loan. Taking this interest actually would not be such a bad deal as you will save all the charges as well as the time and energy needed to get the refinancing done.