Home loan refinancing: when and how to refinance your home loan



Home refinancing involves paying off your existing home loan by taking out a new home loan with better terms such as a lower interest rate.

Mortgage interest rates fell to historically low levels in 2021. In early September 2019, for example, the lowest mortgage rates were around 8.40%, and in July 2021, mortgage rates were about 8.40%. The lowest mortgage loans offered are in the 6.49-. 6.95% range. Lower rates offer homeowners an opportunity to increase their savings during a pandemic by refinancing their loans, according to BankBazaar’s white paper titled “Refinancing Home Loans in 2021.”

Refinancing the plans homeowners are eligible for could help them benefit from lower interest payments, smaller EMIs, and shorter loan terms, allowing them to get out of debt faster. Today, new borrowers can automatically qualify for low rate loans from major lenders. But in some cases, borrowers who took out home loans before October 2019 may pay higher rates.

This increases their overall cost of borrowing and therefore requires evaluating the important question: should they refinance their mortgage? Refinancing could save homeowners hundreds of thousands of rupees. Here’s how:

What is home loan refinancing?

Home refinancing involves paying off your existing home loan by taking out a new home loan with better terms such as a lower interest rate. The new loan can be taken out either from the same lender or from a new lender. The old loan is closed. The borrower can start repaying the new loan. A loan with better payment terms will help the borrower save interest in the long run.

For example, a loan of Rs 50 lakh at 8.00% for 20 years generates interest of Rs 50.37 lakh. If this loan is refinanced at 7.00%, the interest falls to Rs 43.03 lakh, guaranteeing a saving of almost Rs 7 lakh, which can be used for savings, investments and the achievement of various aspirations such as travel, vehicle upgrade or higher education. .

When should you refinance your loan

Planning well for refinancing makes a big difference to your loan payments. Here are the situations in which it makes sense to refinance.

WHEN THERE IS TIME ON YOUR LOAN: Refinancing at the start of your loan term – usually in the first half of the year – makes more sense. Meanwhile, your IMEs mostly focus on interest payments. Therefore, a loan refinanced at a lower interest rate will save money.

WHEN YOU GET LOWER INTEREST RATES: Often, the largest part of the cost of home ownership is the interest on the home loan. A cheaper loan of around 50 basis points or more could result in a shorter loan term, lower EMIs, lower interest payments, and significant long-term savings.

WHEN YOUR CREDIT RATING AND INCOME IMPROVE: An improvement in your credit rating (750 or more) as well as the stability of your income will allow you to access the best loan offers.

WHEN REFINANCING COSTS JUSTIFY: Refinancing comes at a cost. When the projected savings from refinancing outweigh the costs, you should consider refinancing.

WHEN YOU GET BETTER SERVICE: Digitized account management, on-the-fly customer service, proximity to branch, reduced account management costs, coupled with the aforementioned reasons are a compelling case for refinancing.

Who Should Refinance?

Home loans are refinanced for many reasons, some of which are listed below.

BORROWERS ELIGIBLE FOR LOWER RATES: Your current loan rate may be much higher than what is being offered to you today.

BORROWERS WITH HIGH CREDIT SCORES: If your credit score has improved and exceeds 750, you may be eligible for better loan deals.

BORROWERS LOOKING FOR A BETTER REFERENCE: Bank loans linked to pensions have become the preferred choice of clients with good incomes and good credit profiles. Repo loans are priced more transparently, which helps borrowers assess when and to what extent their variable rates will rise or fall.

BORROWERS LOOKING FOR A LESS OR LONGER ISSUE: A refinanced loan could help you pay a lower EMI because of the lower rate. It could also increase the term of your loan, which will make it easier for you to repay the loan.

BORROWERS WHO NEED EASIER PAYMENT TERMS: Terms and conditions could increase borrowing costs – for example, being asked to prepay a minimum of 2X your EMI instead of 1X increases interest.

BORROWERS NEEDING BETTER CUSTOMER SERVICE: Digitized services, instant account management, a responsive relationship manager and proximity to the branch make life easier for the borrower, especially in the event of a pandemic.

OWNERS LOOKING FOR HIGHER RENTAL RETURNS: A cheaper loan could help improve the rental yield on your sub-loan property.

How to refinance

Step 1: Check if your loan is competitively priced and provides you with the quality of service you need. If so, you don’t need to refinance. Let’s call the interest you pay “A” here.

Step 2: If your own lender offers a lower rate than what you are paying, go to your lender and ask to be transferred to the lower rate. This will involve paying a processing fee.

Step 3: Calculate your savings from step 2. This would be the interest saved minus the cost of refinancing. Let’s call it ‘B’.

Step 4: If the lender doesn’t offer you a competitive rate, go to another lender based on your credit and income profile. Ask for the lowest rate you can get as well as the cost of refinancing.

Step 5: Calculate the savings from step 4. Let’s call it “C”.

Step 6: Compare “A”, “B” and “C”. The option that gives you the lowest interest rate and other desirable benefits is your go-to option.

LET’S UNDERSTAND THIS WITH AN EXAMPLE

You have a loan balance of Rs 25 lakh at 8% with nine years remaining on your loan. Your choices:

A: Don’t do anything, stick with your current lender.
B: Look to refinance at a lower rate from your current lender.
C: Look to refinance at a lower rate from a new lender.

Here is the math.

Net savings calculated as interest saved on Option A (Rs. 10.15 lakh) minus new interest minus refinancing costs. The savings percentage is the net savings as a percentage of the interest paid in option A.

The above example shows that despite the same rate offered in options ‘B’ and ‘C’, there are higher refinancing costs in ‘C’, making ‘B’ the preferable option.

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