’5 whys’ to refinance your home loan

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   Here are 5 most prominent reasons to refinance your home loan with a different lender and how it can be financially beneficial for you.

   Home loan refinancing means getting a new loan from another lender to replace the existing lender – because you are offered lower rates elsewhere, or the new lender allows you to borrow a greater amount.

   While these are the leading reasons that push people to switch lenders, there may be other contributing factors like reduced fees and charges on prepayment and foreclosure, which can goad you to go for refinancing your home loan.

1) Interest rate savings

  The most common reason to go for home loan refinancing is interest rate savings. However, it isn’t always that simple. There are a number of aspects to consider before leaping for an attractive rate elsewhere.

   “One: You should examine the remaining tenure of your current loan. If you only have a few years left to pay off your home loan, it may not make financial sense to switch. Interest payment savings are only really sizeable for those who have a long tenure left on their home loans.

    Two: Be sure to look at the various fees and charges that may be levied on you from either of the lenders when you switch your home loan. Often, these can collectively amount to more than what you stand to save in the long run,” Rishi Mehra, CEO of Wishfin.com, says.

   And, three: Be sure that you aren’t hit with any hidden charges when you move to a new lender. Pick a lender who is transparent with their fees and processes.

2) Reducing a big amount by switching to floating rates, or vice versa

  Market conditions play a big part in any decision for home loan refinance. For example, assume you have a floating-rate home loan, a rate that fluctuates in line with market conditions. When home loan interest rates are high, you may be tempted to switch to a fixed rate loan, a rate that doesn’t change (which is at a lower rate).

   “(Conversely) If your fixed rate loan is charged above the market rate, which has fallen, then it may well be in your interest to switch over to a floating rate home loan. There is always the risk in either option that the market could fluctuate further and, therefore, it is important to assess the overall market conditions before taking a decision,” Mehra says.

   Let us take the example of Mr Bansal who opted for a 20-year fixed-rate home loan of Rs 30 lakh at 10% per annum two years ago from Kotak Bank and is now paying an EMI of around Rs 28,951.

   After paying the EMI for two years, his outstanding loan amount is Rs 28,90,686. For the rest of the tenure (18 years), he decides to shift to another bank, say Bank of Baroda, which is offering a floating rate home loan at 8.40% per annum. This way he not only reduces his EMI from Rs 28,951 to Rs 25,996 but, also, his total interest payable comes down from Rs 39 lakh to Rs 34 lakh, saving almost Rs 5 lakh from his pocket.

3) Excellent opportunity for bigger and better top-up deal

   A further incentive to refinance your home loan is when other lenders offer a larger amount at the same rate of interest. This could ease the financial burden on you in the long term, particularly if your home loan didn’t cover the entire cost of your purchased property, in which case a top-up loan might be exactly what you need.

   “(Alternatively) This may open up as an option to you if the value of your property has appreciated since you took the loan, in which case you’re eligible to borrow more should you need to. Third and the most common point which we often overlook is the cost of furnishing your new house. The top-up ensures that you are not spending anything out of your pocket”” Mehra says.

4) Poor service condition of your current lender

   Dealing with certain banks and financial institutions can be a tough nut to crack as a result of complex processes, which make it difficult to maintain an effective relationship without getting transferred to different agents all the time.

   You also suffer costly delays, like when your old lender gives poor customer care or reacts slow, which can lead to changes in home loan interest rates. These are all issues that can push you over the edge and make you look elsewhere for cheaper rates and better service.

5) Change in financial circumstances

   If your income or general financial circumstances change, it is likely to affect your ability to afford EMI payments.

   Refinancing can be a very useful and beneficial option for people looking to save money on their current home loan by lowering their monthly instalments or to those looking to borrow more.

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