Refinancing a home loan consists of taking out a new loan from the same lender or from a new lender on more favorable terms in order to repay the old loan or obtain an additional loan amount as a supplement.
How it works: “The borrower has to submit the mortgage application to another lender for the mortgage refinance approval process,” says V. Swaminathan, CEO of Andromeda and Apnapaisa. The other lender first checks the details of the loan agreement, requests the necessary documents and then gives the final approval for the loan transfer.
Let’s take a look at the reasons you might want to refinance a home loan and what you need to keep in mind.
To benefit from a lower interest rate: “Lowering your interest rate could reduce your interest outflow, your tenure and save more money,” says Gaurav Mohta, Marketing Director, HomeFirst Finance. your EMI payments are allocated to interest outflows. “You should only consider refinancing if you get a reduction in your ROI (interest rate) of 3% or more. Otherwise, for a loan of ??50 lakh or less, the cost of the transaction will be quite high and it won’t make mathematical sense. Rule of thumb: break your transaction costs down into monthly installments and see if you can break even in 6 months, ”he adds.
Switch from fixed rate to variable rate and vice versa: “Sometimes when you choose a fixed interest rate, you quickly regret it because interest rates start to drop. In such a case, switching to a floating interest rate is the prudent decision to make, ”says Mohta.
But in some cases, it may be a good idea to switch to a fixed rate. “If the loan is taken out during the holiday season offer, the interest rates charged are the lowest, so it makes sense to opt for the fixed interest rates because the interest rates will surely increase in the near future, ”says Swaminathan.
To increase / decrease the duration of the loan: “By reducing the amount of the mandate, the borrower can quickly get rid of his debts. Reducing the loan amount can help the borrower save the loan repayment amount, calculated on an annual cumulative or, say, compounded basis, ”says Swaminathan. You can also choose to increase the term of your loan if you want lower IMEs.
You may also want to refinance your home loan to get a top-up loan from the new lender or because you are unhappy with your current lender’s services.
“Before you refinance, you need to know the total interest that will be saved on the old loan (A) and the future interest payable on the new loan (B). AB is the total amount you saved over the life of your loan, ”says Abhishikta Munjal, Risk Manager at IIFL Home Finance Ltd.
Keep in mind that there would be additional costs such as processing fees, document verification fees, etc.
Now may be the time to refinance a home loan, as interest rates may not come down further.
“At the start of the pandemic, the RBI lowered its key rates, but for the past 6 times it has sought to keep repo rates unchanged. And they are unlikely to decrease further. Current low rates can offer a real advantage to many borrowers when they choose to refinance, ”says Santhosh Kumar, vice president of the ANAROCK group.
Never miss a story! Stay connected and informed with Mint. Download our app now !!