Refinancing your home loan simply refers to replacing your existing home loan with a new home loan with different terms and conditions. Home loans are long-term commitments with tenure of up to 30 years and the market conditions change dramatically in such the long run thereby influencing the interest rates.
The primary reason for the refinancing of existing home loan is to get the benefit of lower home loan interest rates if the rate of interest is higher for your existing loan. However, there may be several other reasons, such as wanting to increase your loan amount or tenure, unsatisfactory service from the existing lender, consolidation of debt, etc. which may prompt you to refinance your home loan. Whatever be your reason, refinancing your home loan should be done after weighing all the pros and cons of your decision.
Here are some of the important things you need to consider before you decide to refinance your home loan:
Lower Interest Rate
Refinancing your home loan makes most sense only if the new loan is offered to you at a lower rate of interest. Interest is a large component on your outstanding debt and a lower interest rate will result in reducing your total debt liability which can result in huge savings. As the current rate of interest is much lower now than what it was earlier, you can look at refinancing your home loan to derive the benefits of lower interest rates.
Your credit score is crucial at the time of obtaining any loan. So if you are looking at refinancing your home loan then you must first review your credit score. A lower credit score may make it difficult for you to attain a loan of your choice. A high credit score will be beneficial at the time of refinancing your loan on favorable terms and conditions. So, if your credit score is poor you should first try and improve it before refinancing your loan, else or application may be rejected.
Cost of refinancing the home loan
Whenever you decide to refinance your loan, always remember that it has various costs attached to it. The various types of charges include processing charges, legal charges, and application charges for the new loan and since you would foreclose your existing loan you will have to pay prepayment charges also on the existing loan.
Thorough knowledge of all the relevant charges involved for refinancing housing loans is necessary so as to avoid any unpleasant surprises later. Refinancing will only be beneficial if the overall gains from the transfer of loans are more than the cost of all the relevant charges applicable. Thus, you should refinance your loan only if the savings are more than what you spend on the process of refinancing.
Tenure and EMI on refinancing
Refinancing is a good option if you want to increase the repayment tenure of your loan. If you are finding it difficult to meet your expenses due to high EMI, you can refinance your loan with a new loan of higher tenure to reduce your monthly outflow. Similarly, if you feel that you can pay a higher EMI, then you may want to refinance your home loan with a lower tenure and higher EMI loan.
Implications on your income tax
You can avail of tax exemptions for the monthly interest payments you make towards repayment of your housing loan. If you are paying lesser interest after your home loan transfer then it may result in lesser deductions which will result in higher tax outflow. It is advisable that you opt for a transfer after taking into account the impact of such transfer on your tax savings.
Floating and Fixed Interest Rates
Lenders offer loans at a floating rate and fixed rate and you can choose either of the two options to refinance your home loan. The floating rate of interest is directly influenced by market fluctuations and a fixed rate of interest remains the same throughout the tenure of the loan. It is important that you study the economic conditions before choosing a suitable option for you.
Customer service level and credibility of the lending institute
Before you decide to refinance your loan from another lending institute it is important that you are fully aware of the credibility and customer service of the new lender. Though many people do not put too much emphasis on this at the time of refinancing at a lower rate, good customer service is important to sort out any unexpected issues later. Reading online reviews and talking to existing customers is a good way to gauge the service quality of the lender.
Conclusion: The decision to refinance your home loan has long-term implications and should not be taken in a rush. You must consider the various costs involved and the overall savings and benefits of refinancing and only if your savings are more than the costs then you should go ahead with the decision.