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Home Loan Refinancing: What is it?
Reasons to Opt for Home Loan Refinance
Things to Keep in Mind
Refinancing your home loan can be an excellent option if you wish to go for lower
interest rates or reduce the loan term
from what you are currently serving. Unfortunately, there is a common notion that you
can only refinance your home loan
after you have paid a chunk of it. But this is myth, and in this piece, you will come to
terms with numerous reasons to
opt for refinancing of your home loan.
Refinancing your home loan, also known as home loan balance transfer, is a financial tool that allows you
to pay off
your present loan with the help of another lender and switch your loan to this new
lender. This refinancing allows for
better payment terms, such as lower home loan interest rates, longer tenor, and a top-up loan.
While opting to refinance your existing home loan always sounds like a good idea, like
all big financial decisions, it
must be well thought through. Let us take you through a couple of scenarios under which
you must consider a balance
transfer, and by extension – refinancing.
The promise of a lower interest rate should be the primary factor behind your decision to
migrate your home loan to a
new lender, as it saves you lots on EMI output. No one likes to pay more interest if
there is an alternative. For
example, if your loan amount is currently Rs.50 lakhs and you have taken the loan for a
tenor of 20 years at an 8% rate
of interest, your total interest would be Rs.50.3 lakhs. But, if you are offered a lower
rate of interest, say 7%, for
the same principal amount and at the same rate, your total interest would be Rs.43
lakhs. Consider what a new lender
could give and weigh all options, and then make the decision to move your loan to them.
If you observe that you are incurring more interest through the interest rate you have chosen – be it floating or fixed,
you always have the choice to switch to the other. What’s more is that on floating interest rates, you will be able to
enjoy foreclosure benefits without incurring any additional penalties and fees.
For example, if you have a loan of Rs.50 lakhs with a lender for 20 years at a 12.25% fixed interest rate, your EMIs
will be worth Rs.56,000. However, after two years, another lender offers you a 9.75% floating rate of interest for the
remaining 18 years for the outstanding amount. This will reduce your EMIs to Rs.48000. Now, you will be saving Rs.8000 a
With falling rates of interest, you will also have the option to reduce your loan tenor with a home loan refinance. This
will help you service your loan faster and wrap up your financial commitment towards repaying the loan you have taken,
now with a lower rate of interest.
If you have a more favourable credit score than before, or recently your income has improved, it is time to get better
loan offers. You can refinance your loan to a higher rate of interest to complete the repayment quicker. On the other
hand, if you are under financial stress, you should always look for a lender that will offer you lower rates of interest
or a longer tenor. The longer tenor will ease some of the burdens.
If you opt for a loan refinance, you get the opportunity to take up an additional loan. This is also called a top-up
loan. This top-up loan can be used for any purpose, such as refurbishing your home, paying for a medical emergency, etc.
medical emergency, etc. Bajaj Housing Finance offers a top-up loan facility of Rs.1 crore and even more to eligible
If you start home loan refinance early, then it makes a lot of sense. During the initial days, a major portion of your
EMIs goes towards interest payments. So, if you opt for refinancing during this time, you will ultimately pay lower
interests and save more.
If you are closing your loans early, then there are chances that you must bear a penalty charge. This closing cost can
range from 3% to 5%. However, do note that this is applicable only on home loans with a fixed interest rate. Floating
interest rate loans can be foreclosed at no additional charges.
You Must Start the Process All over Again
The new lender will start your request for a loan from scratch. This means you must undergo all the legal processes,
credit appraisals, etc., all over again. That being said, the process is bound to be smoother as you’ve already been
evaluated and vetted once, as per industry standards.
Refinancing your home loan is a brilliant tool that allows you to make your home loan more affordable, provided you use
this tool timely. It is a valuable financial strategy that helps you keep your debts in check if you use it carefully
and after thorough research.
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