Consider costs before refinancing your home loan

Taking a home loan is the first step to buying a home of your choice while paying for it in installments over a fixed tenure. This involves applying to banks and lending institutions that scan your income and financial requirements before lending you the necessary amount to pay for your home. However, it is prudent to keep your eye on your financial investments even after they have been invested in. This applies to home loans too where many people consider getting refinanced for certain reasons, some of which include:

Saving on EMI amounts: Taking a home loan involves paying off the loan amount at a predetermined interest rate. This can involve repaying the principal amount borrowed at high interest rates depending on the market conditions during that period. While shifting the home loan to a new lender, borrowers can benefit from declining interest rates. 

Raj Khosla, founder and managing director, MyMoneyMantra.com, says, “By switching a lender when interest rates are plunging, you can seal a deal at lower annual percentage rate (APR) and save a substantial amount on repayment. You can either moderate monthly installment or reduce loan tenure, thereby enjoying greater flexibility in loan reimbursement. However, declining interest rates should not be the only deciding factor for refinancing. Perform a cost-benefit analysis & consider all costs involved, such as foreclosure charges (in case of existing fixed loan), processing fees, incidental charges, legal fees, etc.”

Switching between fixed interest and floating interest loans: Depending on the requirements, borrowers choose between fixed and floating interest rates during loan application. However, changing market trends may prompt to switch from one to the other. Home loan refinancing helps to tackle such a situation. CS Sudheer, founder & CEO, IndianMoney.com, says, “Switching from fixed to floating rate home loans saves interest, especially if interest rates are expected to fall. The RBI has been cutting repo rates and you can switch the loan, paying a nominal fee. The floating rate home loan may be 1-2.5% cheaper. Make the switch early in the tenure of the loan.”

Availing top-up loan opportunity: Sudden requirements may cause borrowers to look for added loans. With home loan refinance, borrowers may consider applying for added loans over and above the loans they had initially taken and repaid in part. Dinesh Rohira, founder & CEO, 5nance.com, says, “Taking top-up loans is solely at the discretion of the loan applicant. It could be for refurbishing or minor repair work that needs to be done. It becomes an easy and affordable option as compared to taking a personal loan for the aforementioned requirements. Understand that this is an additional loan, it generally is up to 25 bps, i.e., 0.25% expensive as compared to the normal rate of the loan.” 

“Factors like credit history, payment schedules of the existing loan, eligibility of the applicant to take an additional loan and a track record of at least two years are the prime parameters considered by the companies before issuing the additional loan to the applicant. An added advantage in getting a loan refinanced is that the consumer has a bargaining power on the existing loans and can avail loans up to 50 bps cheaper as compared to the current rate of interest paid. This refinanced loan can save a few lakhs over a tenure of the loan in terms of the interest to be paid,” said Rohira.

In sync with one's financial condition: Your ability to repay your home loan depends on your financial condition. This means that you may wish to opt for lower EMIs over a longer repayment tenure in the event of a deteriorating financial condition. Home loan refinancing involves replacing your original tenure with a longer one or opting for lower EMIs at reduced interest rates. Navin Chandani, chief business officer, BankBazaar says, “Even a single missed EMI will be noted by the bank. While the first default is not looked upon very seriously, it can have an impact on your credit score. Even a single missed payment will elicit a follow up from the bank, as well as penalties and interest on penalties. If you are struggling with the EMI amount, you may want to consider reducing your monthly outgo. In case of an emergency that makes it difficult for you to pay your EMI – say a job loss or an accident, home loan refinancing helps as you may approach your new lending bank or lending financial institution and request them to increase your loan tenure. This would reduce your monthly EMI amount though you may end up paying a higher amount in interest.” 

Poor service of your existing bank: Poor service quality can be a reason enough to change your bank. Approaching a different bank to lend you the necessary amount means that you avail better services at the same cost or even lesser while freeing yourself from the piteous services of your existing lender.