Home Loan Refinance - Moneysaver or Waste of Time ??

Refinancing an existing home loan means availing loans on the same property from another lender or financial institution but with a different rate of interest. There are multiple misconceptions concerning refinancing a home loan such as no new loan can be availed without paying off the existing one. Refinancing means spending the extra money to get all formalities done; the rate of interest cannot be altered, etc.

However, the fact is that in the majority of these cases, refinancing leads to reducing monthly installments or interest rates you were paying on your existing loan.

Types of refinancing

First, let us understand the types of refinancing options are available in the market:

Rate-and-term

This is the most common type of refinancing option wherein the borrower pays the original loan and replaces it with a new loan requiring lower interest rates.

Cash-out

When underlying assets collateralizing the loan increases in value, then the borrower chooses a cash-out refinancing option. The value or equity in the asset is exchanged for a higher loan amount. If the value of an asset increases, then rather than selling it, the borrower can gain access to that value with a loan.

Cash-in

By opting for this, the borrower can pay down some portion of the loan for a lower loan-to-value ratio or smaller loan payments.

Consolidation

This type of refinancing option can be used when a borrower avails a single at a lower rate and pays his existing debt with the new loan. This leaves their total outstanding principal with effectively lower interest rate payments.

Though refinancing can cost anything between 2-5% of the principal amount and requires completing some formalities like paying application fees, doing appraisal and title search, etc; however, here are the reasons to get your home loan refinanced:

Securing a lower interest rate

This is the most compelling reason for borrowers to avail of refinancing options. Borrowers can reduce their existing interest rates if they opt for refinancing as it will not only bring down their total interest cost but also their EMI. In india in the recent home finance rates have been reaching new low every year, with some financial instituions offering rates as low as 6%. Borrowers could also consider refinancing as an option to shorten the term of their mortgage.

Also, lowering interest rates is one of the strong reasons, which leads to several people opting for refinancing. Though the majority of home loans are offered on a floating rate, there are very few lenders that reduce the rates with the base rate declining.

Transitioning from a floating rate to fixed-rate or vice versa

There could be any scenario related to the interest rate irrespective of whether you have opted for a fixed rate or floating rate. If you have a fixed rate of interest, then declining interest rates might bother you or, if you have opted for a floating rate, even then fluctuation in rates might be a cause of concern. In such a case, you would like to move towards choosing refinancing as an option. Though the borrower might have to pay some charges as pre-closing, that is negligible if compared to savings that would be realized in the long term.

Option for top-up

If a borrower wants to avail of an additional loan on the existing one, that too at a lower interest rate, then he can opt for refinancing only that additional amount from some other lender. This way he can get the benefit of lower rates.

Reducing the loan tenure

Many times borrowers opt for refinancing as they get to reduce the total mortgage tenure along with reducing the EMI amount.

Not satisfied with the service of the existing lender

After some time, you might find your lender’s service unsatisfactory, such as not providing statements on time, not reacting to any change in interest rates, etc. Then refinancing and getting a loan from some other lender would be the best way out for you.

Things to consider while refinancing home loan

As a borrower, your decision to opt for refinancing should be a well-researched one. You should carefully consider all the relevant factors before taking such a big step. So, here are a few things you must consider before you opt for refinancing:

Cost-benefit analysis

Before going in for refinancing, analyze all the costs involved, such as processing fees, legal fees, prepayment charges, etc., so that you can have significant net savings.

Consider other factors as well

Lower interest rate is one of the most significant factors people opt for refinancing. But along with these factors, they should also consider other factors like brand, reputation, customer care policies, customer service, etc. They should also thoroughly check repayment terms and conditions specified by the new lender so that they do not regret their decision afterwards.

Refinance timelines

This is a huge factor to consider when the borrower is making the decision. The borrower must be vigilant about the stage of their loan repayment cycle they are going in for refinancing and what is their outstanding principal amount. Because it doesn’t make sense to go for refinancing when you have already repaid more than 70% of your loan.

Refinancing is an excellent tool if used wisely, as it allows smart management of finances and leads to cost reduction.