Home loans are one of the biggest financial burdens for an individual in his/her life. It’s a long-term loan that ranges, on an average, from ten to thirty years. Besides the principal, a home loan EMI also includes the interest component. The interest rate offered by your lender plays a crucial role in determining the overall cash outflow of your loan. Higher the interest you are charged, bigger is the loan burden (big EMIs, longer tenures) and vice versa.
Mortgage refinance (also known as home loan refinancing or home loan balance transfer) is the process of switching an existing home loan from one lender to another. There may be situations where borrowers come across lower interest rates than the rate they are currently being charged. In such scenarios, the borrower can switch his/her existing loan in the middle of the tenure to avail better rates.
Home loan transfer helps in reducing the overall loan burden of the borrower. With a reduction in the interest rate, the borrower can reduce his/her EMI or shorten the tenure. In this article, we share with you all that you need to know before going in for a home loan transfer.
10 Key Things to know about Mortgage Refinance or Home Loan Transfer
If you are contemplating a home loan transfer, here are a few things to be aware of before opting for the facility.
The best time for a home loan transfer is when the remaining repayment period is five years or more
Generally, most borrowers opt for a loan transfer when they come across better interest rates elsewhere or when the RBI reduces the interest rates for home loans. However, home loan refinance doesn’t make economic sense when the remaining tenure is less than five years.
When you transfer your home loan, you need to pay processing fees and other miscellaneous charges. Additionally, you are likely to avail reduced interest rates when the repayment tenure is lengthy. Also, note that the bulk of your repayments during the early years go towards the interest. Hence, you would have finished the maximum interest repayments during the initial stages.
So, if you’re looking to switch your home loan, then it’s better to switch as early as possible in the tenure and not wait till the last years of the tenure.
Don’t default on your home loan EMI payments, if you’re looking for mortgage refinance
If you’re considering switching your home loan to avail reduced interest rates, then ensure that you never default on your home loan EMIs. When you apply for home loan transfer with the new lender, the new lender will get in touch with your current lender. The new lender will likely take a look at your previous repayment records. If the lender notices delayed or missed payments, they are not likely to approve your request for a home loan refinance.
You need to provide all property-related documents to the new lender
Home loans are secured loans, and you have to provide the required documents. Your new lender will require you to submit all documentation – both personal and property-related, before they accept your request for a home loan transfer.
Most borrowers submit their property-related documents to their existing lender while applying for the home loan initially. You have to request your current lender to forward all the required documents to your new lender, within a specific period.
Since home loans are high-value loans and secured loans, the new lender will hold all your documents as collateral until your loan is complete.
Check if there are any prepayment penalties or foreclosure charges
In India, the RBI has banned lenders – banks and housing finance companies – from levying prepayment penalties for home loan borrowers. This applies to both fixed and floating-rate loans. However, when you transfer your existing home loan to a new lender, the lender may levy prepayment penalties for the new tenure. Make sure to check if there are any such charges before choosing a new lender.
The fees charged by the new lender for the transfer is negotiable
The new lender will charge you a processing fee when you transfer the loan. Lenders are likely to waive the processing fees for borrowers who have a stellar record. If you have repaid all your previous EMIs on time, have a good credit score, you can negotiate with the new lender to waive the processing fees.
Certain banks like the State Bank of India do not levy any processing fees for home loan transfers. While choosing lenders, look for banks or housing finance companies that do not collect any processing fees for balance transfers.
Check the interest rates track record of the new lender
Very often, borrowers are enticed by "discounted interest rates" advertised by lenders. However, these rates may not be long-term and available only for a short period. To avoid falling into such traps, make sure to track the interest rate history of the lender. Double-check whether the proposed interest rate is real and available for the long-term, and not just a short-term gimmick.
Find out the service quality offered by the new lender
Before you transfer your home loan to a new lender, verify the service quality provided by the lender. Check if the lender has excellent customer service and is easy to reach for any queries or complaints. Keep in mind that lower interest rates should not come at the cost of inferior service.
Know your credit score
Lenders today have tightened their eligibility requirements for home loan approvals. Besides deciding the eligibility of borrowers, credit scores also play a crucial role in impacting the interest rate you're offered. Note that though the lender may advertise a discounted interest rate, you may not be eligible for it, if you have a poor credit score or rating. So, be aware of your credit score before you approach a new lender for home loan transfer.
Check the loan eligibility criteria of the new lender
Different lenders have varying eligibility requirements for borrowers. Make sure to check if you meet the eligibility requirements of a lender before approaching them for the home loan transfer.
Calculate the cost of refinancing
Before you opt for home loan refinance, it's essential to calculate whether you benefit from it. Start by calculating the cost of transfer – the closing fees charged by your current lender, the processing fees charged by the new lender and other miscellaneous charges. Next, calculate the savings you get as a result of the transfer. Check if the savings are more than the costs before you opt for the transfer.
Choose Mortgage Refinance to Reduce your Home Loan Interest Rates
Mortgage refinance (or home loan transfer) is an excellent option to help reduce the interest you pay on your home loan. It can help you enjoy massive savings, especially when you're currently on a high-interest home loan. However, make sure that you're gaining benefits before you opt for a loan transfer.
Understand the various features and benefits of home loan refinance to calculate the breakeven point, and then opt for the feature if you enjoy considerable savings, as a result of the move.
Make sure to keep the above points in mind to ensure a smooth home loan transfer and to benefit from it.