Introduction
Home refinancing is the process of replacing an existing home loan with a new loan. Normally, 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. Additionally, some 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.
How is Home Loan refinance done?
The easiest way of refinancing is to get your new lender to settle the dues with your existing lender and take over the outstanding loan amount. Once you have decided on a lender who offers better terms and conditions, you may complete the documentation and other formalities upon which they would pay off the loan to the old lender and take over the outstanding loan amount. You would then start paying EMIs to the new lender.
When to opt for Home Loan refinancing?
Here are some of the top situations when home loan refinancing should be considered:
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When 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.
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When You Want to 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. In such a case, you will want to 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.
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When You Want to Reduce 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.
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When You Want to Reduce the 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.
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When You Want to Avail More 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.
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When You Want 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.
Important Factors to Consider Before Opting for Home Loan Refinance
Refinancing a home loan should not be a casual or impulsive decision. It has to be carefully thought through and all relevant factors ought to be considered before actually opting for refinancing. Here are some key factors that may influence your decision:
1. Financial Factors - Refinancing involves costs. 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. are some of the costs to be considered. You would do well to make 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 - Interest rate should not be the only factor that influences your decision to 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).
How to Refinance a Loan?
Refinancing is like shopping for any loan or mortgage. First, take care of any issues with your credit so that your credit score is as high as possible and you qualify for the lowest interest rates. Have a rough idea of the rates and other terms you desire in your new loan. Remember: These terms should represent an improvement on the terms of your existing loan. It's helpful to do a quick loan amortization to see how your interest costs would change with different loans.
Next, shop around to find a qualified lender with the best terms. Don't just choose your current lender; get at least three or four quotes from competitors before inquiring with your current lender about what it is willing to offer.18 If your current lender wants to keep your mortgage, you might be able to get even better terms.
Don't open any new credit during the refinancing process; it could hinder the deal. Before signing the deal, carefully review the new loan terms and all associated fees so that you know what to expect financially when it's time to make payments.
FAQs
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What is refinancing?
Refinancing lets you change your home loan to suit your new circumstances.
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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.
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How to refinance my home loan?
You can check out some of the refinancing options online and carefully assess the offers against your requirements.
End Note
Home loan refinancing means availing a new loan from another lender to pay off an existing one. Two primary reasons for home refinancing are, a)to get the benefit of a lower rate of interest and b) to avail a top-up on the original loan amount. There could also be many other reasons for taking a new loan to pay off an older one. These can be poor service quality of the existing lender and consolidation of the loan portfolio, among others.