During a refinancing, the outstanding loan with the existing lender is settled by the new lender who then takes over the remaining loan.
Home loan refinancing, commonly known as a balance transfer, is the method of transferring the outstanding loan balance to a new lender. Switching your loan to another bank or housing finance company is only useful when the other lender offers a lower interest rate. During a refinancing, the outstanding loan with the existing lender is settled by the new lender who then takes over the remaining loan. Once the loan is refinanced, the previous loan account is closed.
First, interest rates are compared and if the borrower is convinced that he is getting a better deal with a new lender, he decides to refinance his existing home loan. A new lender will do their own due diligence on eligibility and interest rates based on the borrower’s credit score, then take a refinance call. Once the documentation and other formalities are completed, the loan is transferred to a new lender at a new interest rate.
Refinancing can significantly reduce the total interest payable on a home loan. For example, Mr. R Kumar had been availed of a home loan with an outstanding loan amount of Rs 1 crore from XYZ Bank with the applicable interest rate being 7.1% per annum for the remaining term of the loan of 20 years. At the same time, several market banks were ready to offer him a home loan transfer at an interest rate of only 6.4% per annum. Thus, there was a difference of 0.7% per year, resulting in a saving of approx. Rs 10 lakh in 20 years if he transfers his loan to a new bank.
So, refinancing helps in such a situation when the borrower pays a higher rate of interest on the existing loan.
Why should you opt for refinancing?
It makes sense to refinance if you’re paying a high interest rate on your existing loan when you’re eligible to borrow at a lower rate from other lenders. Typically, borrowers compare prevailing interest rates, but changing market scenario and revising interest rates over the years make old loans expensive. Currently, borrowers are moving their old home loans to the new interest rate regime where rates are at historic lows.
Sometimes a borrower feels the pinch of high EMIs. In such a situation, the borrower can get a home loan refinanced by another lender that offers a longer repayment period, resulting in a lower EMI obligation. The borrower can also consider refinancing a home loan when he is not satisfied with the applicable services or conditions.
When Should You Choose a Home Loan Balance Transfer?
It is advisable to opt for a home loan refinance during the first years of your loan. It can help you save a lot of interest. Suppose your financial situation has improved and your credit score has increased significantly, but your current lender is not ready to further reduce the interest rate on your home loan, you can explore refinancing options from loan from other banks or financial institutions that can help you reduce the interest. on your current mortgage.
Also, when you need more funds to renovate your home or for any other requirement, you can benefit from additional funds at the time of refinancing.
Drawing
In the illustration above, the borrower can save approx. Rs 4.71 lakh by opting for the refinance. It is generally advantageous to go ahead with a home loan refinance when the total interest saved is greater than the total fees (processing fees, MOD fees, documentation fees, etc.) applicable to the refinance of the loan .
Things to keep in mind
Consider the interest rate and the difference it makes to your EMIs and your money order. Refinancing may incur additional costs such as processing fees and legal fees. Also check all types of other fees such as foreclosure fees (usually not applicable to variable rate loans, but most banks charge them when foreclosing a fixed rate loan), documentation fees, MOD (memorandum of deposit of title) fees, etc. It is therefore a good idea to do a thorough cost-benefit analysis.
Another crucial thing to check is the terms and conditions. Read them carefully and make sure that you do not incur any additional liability when refinancing your home loan. Focus on the long-term pros and cons while planning to refinance your home loan and take a legal appeal considering all the pros and cons.
(The author is CEO, Bankbazaar.com)