Refinancing a loan means availing of a new loan to pay off the existing loan amount. The new loan may have a different tenure or interest rate. Loan refinancing is an attempt to negotiate better terms from your lender. Your previous loan is transferred to the new lender and you continue paying off the loan amount to the new lender.
While a loan refinancing process is super simple requiring you to only process a request to the new lender, knowing when to refinance a loan is crucial. Loan refinancing may come with additional costs like processing charges and closing fees. You must carefully weigh the benefits of loan refinancing before taking the plunge.
The purpose of refinancing a home loan is to obtain better terms that can improve the loan borrower’s financial situation. For example, if someone has several high-interest credit cards, they may choose to consolidate all their debt into one loan with a lower interest rate. Similarly, if someone is paying a high mortgage, they may choose to refinance it to obtain a lower-interest home loan, which would significantly reduce their total payable interest.
When is the right time to do a home loan refinance?
If you plan to do a home loan refinance, you must take note of several factors like borrowing costs, processing fees, closure charges, and the like. The right time to do a home loan refinance depends on the borrower’s current interest rates, financial situation, and existing loan terms.
- Reduction in interest rates: If you find a new lender that offers better loan terms, repayment tenure, and a considerably reduced interest rate, you can apply for home loan refinancing. It will bring down your monthly EMI amount and alleviate your financial concerns.
- Credit scores have improved: If you had taken a home loan when you had poor credit scores, you were likely slapped with a higher interest rate and poor loan terms. Since then, if your financial situation has improved, reach out to your lender and consider home loan refinancing.
- Switch from floating home loan interest rates to fixed home loan interest rates and vice-versa: If the market interest rate has increased and you had availed of floating interest rate home loan, you can refinance to a fixed home loan to reduce monthly payments. It is always better to choose fixed home loans to remain unaffected by market changes.
- Take a top-up loan: When you are applying for home loan refinancing at a new lender, they will view it as a fresh loan. If you need funds to consolidate debts or home renovation, you can apply for a top-up loan over your balance transfer. Only if you have a good repayment history, you will be eligible to take a top-up loan.
- Unable to afford the present interest rate: If your financial situation has worsened since you began repaying your existing home loan, you can choose to refinance your home loan at a lender that offers lesser interest rates. You can negotiate for a lower interest rate and better repayment terms at your new lender if you have a good record of paying back debts.
- Dissatisfied with your lending institution’s customer service: If your existing lender is rude, never explains loan terms clearly, and harasses you with unnecessary paperwork, you can choose to refinance your home loan. Make sure to weigh the balance transfer costs and reap the benefits of home loan refinancing in India.
- Need to assess home equity: If you have paid a higher down payment, you own more of your house and have higher equity. Commonly, lenders want you to pay 20% of the total loan amount as a down payment. Over time, as you pay back the loan amount your home equity increases. You can apply for home equity loans or a second mortgage when you are refinancing a home loan to pay off debts or have other personal expenditures.
Key points to keep in mind when thinking of refinancing a home loan
Make sure to evaluate all possible scenarios before doing a home loan refinance. Here’s a quick rundown of the most important points to keep in mind before refinancing a home loan.
- Understand the transferring costs: Most lenders will charge a considerable amount for transferring your loan balance to a new lender. You may also be asked to pay the processing fees and incur additional costs. Make sure to talk to your lender and calculate the consolidation charges before applying for home loan refinancing.
- Try refinancing your home loan in the early years: If your total home loan tenure is 20 years and you are already in your 15th year of paying back the loan amount, it is better not to apply for home loan refinancing. You will have already paid a huge chunk of the home loan interest to your existing lender, so you won’t be able to reap the benefits of loan refinancing.
- Note that the new lender will require considerable paperwork: If you are thinking of doing a home loan refinance, note that it may be a time-consuming process. Your current lender has to approve your request and process the additional costs. Next, you have to apply for a home loan from your new lender and file the paperwork. If you route it through ApnaPaisa, you may wrap up quickly, for they are known for their quick loan disbursals with minimal paperwork.
- Make sure your previous monthly EMIs are paid: If you have poor credit scores, or you have been irregular with your previous home loan EMI repayments, new lenders may not trust you. Your previous financial institution may also disapprove your home loan refinancing request. Make sure all your debts are consolidated before applying for home loan refinancing in India.
- Check the lender’s reputation: If you are not receiving proper customer service at your previous lender, you may look to refinance your home loan at a new lender. However, make sure to check the lender’s reputation before taking this step.
What to do if home loan refinancing is not an option?
If home loan refinancing is not on the table, then there are other strategies loan borrowers can apply to improve their credit score, reduce debt, and manage their expenses.
- Negotiate with lenders: If you are dissatisfied with your previous lender’s customer experience, try re-negotiating your loan terms and conditions. If you have decent CIBIL scores and pay your EMIs on time, lenders may offer better terms.
- Reduce monthly expenses: If you have hit a tight financial spot and are unable to repay the monthly settlements on time, try to cut back on your wants. Set a budget and stick to it until your financial situation improves.
- Consult an expert: Reach out to ApnaPaisa for expert opinions, best home loan deals, latest developments in the mortgage sector, etc.