What is Home Loan Refinancing, and Should You Do It?

A refinance of home loan is a process of transferring your home loan balance to a different vendor. You may be happy with your home loan interest rate and repayment tenure. But what if you discover a lower interest rate with a different vendor? You would naturally want to switch. And when you do switch, the new lender may give you a lower mortgage refinance interest rate. 

So, What is the Refinance of Home Loan?

It is nothing but taking on a new loan at a lower interest rate to pay off an existing home loan. Alternatively, the lender can pay your existing loan directly and issue a new loan with better terms. 

Interest rates fluctuate over time. They are influenced by the economy and markets. When you notice lower interest rates, it’s best to seize them and opt into home loan refinancing.

When Should I Consider Refinancing?

There are some scenarios when home loan refinancing makes financial sense. 

When the interest rate is lower

This is one of the most common situations for a case of refinancing your home loan. Why would you continue paying a higher interest rate if someone is offering a home loan with better interest rates and conditions?

When you want to reduce your home loan tenure

If your financial position has improved and you wish to repay your loan as soon as possible, refinancing will help.

You want better terms on your home loan

You may realise that your loan provider is now how you presumed them to be before securing the loan. Or their service standards may have dipped over time. In that case, you can take a new home loan from a lender with better terms and clear your existing loan. 

You want to switch from fixed to floating interest home loans

You may come across a situation when the current market home loan interest rate is lower than your fixed interest rate. This would tempt you to switch to a home loan with a floating interest rate. Opting for refinancing will help save a lot of interest amount. 

Things to Bear in Mind Before Refinancing Your Home Loan

Eligibility

Your existing lender will allow you to avail of the refinancing option if you have paid a minimum number of EMIs. Home loan refinancing works best in the first five years of your repayment tenure; the interest will be the highest at this time. 

Research

Monitor the fluctuation in interest rates. An ideal scenario for refinancing of home loan is a falling interest rate. 

Evaluate

Evaluate how refinancing can work in your favour. Check if moving from a fixed to a floating home loan will benefit you greatly. A thorough evaluation will give you a clear picture of whether you would benefit from refinancing. 

Fees

There will be some processing fees involved in the refinancing process. Check with the new lender and estimate how much that would mean for your current situation. Don’t give a chance for unnecessary surprises. 

Applying for Home Loan Refinancing

Application

Evaluate your options of lenders, interest rates and tenures offered and find out if these lenders are trustworthy (check their ratings with rating agencies).

The lender will require your income proof, identification documents, ITR filings, and verify your credit score. Additionally, you will need to submit verified balance sheets from a CA if you are self-employed. 

Interest Rate

You need to decide if your interest rate would be fixed or floating (variable). With a floating interest rate, you might get a lower interest rate. But it will also mean you’re at a risk of a higher refinance mortgage rate. So, discuss this well with your lender. 

Approval

The lender will verify your documents and financial information. Your home will be appraised to determine its value and prepare a fair estimate. 

Existing Loan Closure

On completion of your appraisal, the process of loan closure is initiated. You will receive a closing disclosure document containing the final working of your existing loan. Post this, you can close your loan with the money provided by the new lender. 

Conclusion

Home loan refinancing can save you lots of money on interest rates. This process, however, can backfire if you haven’t done your research. But, if you notice a downward trend in interest rates, refinancing your loan can be the way to go. 

With a refinance of home loan, you can gain the benefits of lower interest rate, reduced tenure, and better terms on your home loan, and switch to a floating interest loan to save you even more money. 

It all comes down to your due diligence and evaluation of the situation. When the situation is right, refinancing will be the option that saves you a lot of financial burden on your home loan.