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Home Loan Refinancing

Home Loan Refinancing
 

Home loan refinancing can help you get the benefit of a lower interest rate and better service, among others.

Abhishek has a home loan with ABC housing finance company. The interest rate is a floating rate of 8.7 percent.  After he has repaid the loan for two years six months, he gets an offer from XYZ housing finance company of a floating rate of 8.15 per cent. Can Abhishek benefit from the lower interest rate being offered?

If you are in a situation like Abhishek, you can refinance your home loan. When you got for a home loan refinance, you take a new loan from a different lender to pay off an existing loan. There are several advantages to refinance home loan. You may opt for a home loan refinance if any of these apply to you. 

  1. You get a lower rate of interest: This is the most common reason why people go for a home loan refinance. If you see that you are paying a higher rate of interest and some other lender is offering a more favourable rate, it is natural to go for the new loan and reduce the amount of interest you need to pay on your home loan.
    Refinancing your home loan thus makes more sense in a falling interest rate scenario. Not all lenders are quick to reduce their home loan interest rates when there is a fall in interest rates. Some lenders may do it only after a lag; that is, they may lower their home loan interest only after some time. When you refinance your home loan, you can get a loan which has lower interest rates.
  2. You want to switch from a fixed rate to floating rate home loan or vice versa: Home loans are either on a fixed rate or a floating rate. This needs to be decided at the time the loan is taken. However, there may be situation when a customer who has a fixed-rate loan at a higher interest rate wants to move into a floating rate loan, especially when the interest rates are moving downwards. On the other hand, there may be those who currently have a loan at a floating rate who want to get into a fixed-rate loan so that their EMI stays constant for a while, irrespective of the interest fluctuations. In both these instances, it makes sense to refinance your home loan. When you go for a refinance loan, you can shift to a different interest-paying regime.
  3. You want to change the tenure or EMI: A home loan is a long term financial commitment. Over this period, your financial situation may change. Let us say that certain financial obligations come up and you have cash flow issues. In that case you may want to extend the tenure of the home loan. This will reduce your monthly EMI, or, you may be in a financial situation where you have a higher income and can afford to pay more EMI. In that case you can reduce the loan tenure and get into a higher EMI repayment scheme. When you go for a home loan refinance, you can tweak your home loan according to your needs.
  4. You want better customer service: Sometimes, you may not be happy with the customer service standards of your existing bank. For example, there may be a delay in issuing loan statements. The customer service, in general, maybe sloppy. In such a situation it is prudent to move your loan to another lender who has a better track record as far as customer service is concerned. So, if your experience with your existing lender has not been good, home refinance loan makes sense.
  5. You want to borrow more: When you go for a home loan refinance, you can also get some indirect benefits. Your new lender is likely to offer you a top-up loan. Your existing lender may also offer a top-up, but you may get better rates of interest if you take it with the new lender. This is because the new lender will consider the current value of your property and also take your loan repayment record into account. Top-up loans are available at competitive interest rates, and the money can be used for several purposes like paying off debt or also for renovating your home. A top-up loan is a better option of getting funds as compared to other options like personal loans where one has to pay a very high rate of interest. If you are looking for a top-up loan, home loan refinance is a good idea.

However, there are certain things you need to keep in mind when you go for a refinance loan. We take a look.

  1. Always try and switch the loan in the early days of your tenure, because you can reap the maximum benefits of a lower interest rate. If you refinance your loan after the first five to six years, it may not make much sense as you would already have paid off most of the home loan interest in that period.
  2. Remember that when you refinance the loan for your home, it is like taking a new loan. So you need to do all the paperwork and fulfil KYC requirements again. These would include a legal verification of the property and other procedures which may be time-consuming.
  3. If your loan repayment track record is not good your credit score will have suffered. In this case, you may not be able to refinance your home loan.
  4. You will need to pay a processing fee, valuation fee and other charges. In some cases, your existing lender may levy prepayment charges. Before you do a home loan transfer, it is thus wise to do a cost-benefit analysis.  So, you should not blindly opt for home loan refinance based just on lower interest rates. The savings that you make going ahead should be enough to justify your move.

Now we will look at a couple of conditions that need to be fulfilled to be eligible for a home loan refinance. Firstly, you would have to have paid a minimum number of EMIs to your existing lender. Secondly, the property should be already occupied or be ready for occupation.

The first step is to approach the new lender with the following documents.

  • No objection letter from your existing lender
  • A foreclosure letter
  • Proof of income and IT returns
  • Home loan related documents which your current lender has in their custody.

The new lender will then review your credit history and sanction the loan. They will also evaluate your property.

Home loan refinance therefore can prove beneficial depending on changes in circumstances. Done wisely and at the right time, it can lead to substantial savings.

Want to refinance your home loan at Indiabulls Home Loans? Click here

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