Refinancing your home is the process of replacing an existing home loan with a new loan. Often, people refinance their home loan to reduce their monthly payments, lower their interest rate, or change their loan program from an adjustable-rate home loan to a fixed-rate home loan. A lot of times people need access to cash to fund home renovation projects or paying off various debts and will leverage the equity in their house to obtain a cash-out refinance.
Why is Refinancing Required?
What would be more convenient for the home buyers, than they can lower their EMI hassle-free? You can save a good amount of money in a year if you can save a quarter of a percent every month. Why take the extra burden on your shoulders, when you can save extra bucks by slashing the interest rate? You can invest that saved amount in other avenues for a good return on investment (ROI). Your preference maybe a home renovation, vacation or retired investments.
In case if you have extra funds or savings, then you can lower your home loan tenure as per your convenience. Again, to reduce your EMI, you need to enhance the tenure of your home loan. People also opt for refinancing a home loan when they want to switch fixed rate to floating rate of interest or vice versa. Life is unpredictable, sometimes people lose a job or get a new one, they are in dire need of money or they need relief from EMI after a while. If your lender is providing the poor quality of customer service, or not reducing the EMI even after the change in the lending rate of the bank, then you can opt for home loan refinancing.
What is the Outcome of Refinancing Your Home?
Here are some outcomes that arise from refinancing your home loan:
You Get A Lower Rate of Interest: You wouldn’t want to pay a higher interest rate if you have the option of moving to a lower rate. Refinance, therefore, results in larger savings.
You can Switch from Fixed Rate to Floating or Adjustable Rate of Interest: After you have opted for a fixed-rate loan, it may so happen that interest rates start declining. Refinancing lets you switch over to a floating rate loan to save on interest cost. If your existing lender does not permit you to avail of the floating rate option, you can refinance the loan by switching over to another lender.
Reduction in the Home Loan Tenure: Initially, you may have opted for a long tenure; however, if your financial position has changed for the better, you may want to reduce the tenure of the loan. This is possible with refinancing.
Reduced EMI Amount: Due to a change in circumstances, you may want to lower your monthly commitments and hence look for a lower rate and/for a longer tenure.
Favourable Terms or Better Service on Your Home Loan: After taking disbursement of the loan, you may find that the lender’s service standards are below par, or you did not get the best deal. In such cases, you can consider switching over to another lender.
Capability to Borrow More: After taking a loan, your funding needs may have increased because of changes in the design or specifications of the house. In this case, refinancing could help you avail additional funds by way of a bigger loan.
Things to Consider While Opting for Home Loan Refinance
A casual or impulsive decision made for home refinance could prove to be costly. Therefore, it has to be carefully evaluated and all the factors must be considered before finalising home refinance. Here are some key factors that may influence your decision:
1. Financial Factors - Refinancing has its own set of costs which include, legal fees, processing fees, incidental charges with the new lender, prepayment charges with the existing lender (if you have taken a fixed rate home loan), etc. Ensure to carry out a thorough cost-benefit analysis before taking the leap. The decision is not just about a lower rate of interest. Refinancing should mean a substantial net saving by the time the loan is repaid in full.
2. Non-Financial Factors - The interest rate is not the only factor that influences refinance. You should also look for intangibles such as brand name, reputation, customer-friendly policies, service aspect, the safety of documents, etc. Repayment terms and conditions specified by the new lender would also play a role in your decision. Another factor you need to consider is the timing of the refinance – at which stage of your loan repayment are you going for refinancing and what is the principal outstanding amount? It may not make much sense to refinance a loan that has been repaid to a large extent (say 70% or more).
Additional Reading: How to refinance a home mortgage with poor credit scores?
What is refinancing?
Refinancing lets you change your home loan to suit your new circumstances.
What do I need to consider when refinancing?
When done properly under the right circumstances, loan refinancing can be very beneficial. However, there are drawbacks involved - namely the cost. The reasons for refinancing should be legitimate and the calculations need to be run to ensure the long-term savings outweigh the short-term costs.
How to refinance my home loan?
You can check out some of the refinancing options online and carefully assess the offers against your requirements.
Refinancing of home means choosing a new loan from a different lender to pay off an existing one. Refinancing can be considered to benefit from a lower rate of interest and to avail a top-up on the original loan amount. Many other reasons could influence the decision of taking a new loan to pay off an older one. These could include poor service quality of the existing lender and consolidation of the loan portfolio, among others.