Home loan refinancing involves replacing an existing home loan with a new loan that has more favorable terms, such as a lower interest rate. The new loan can be taken from the same bank or a new bank. The funds from the new loan can be used to close the old loan and start repaying the new loan. Since the new loan has a lower interest rate, the EMI burden will be reduced.
– Lower interest rate
– Lower EMI
– Shorter loan tenure, which enables faster loan repayment
– Increased long-term savings on interest
Save More with Lower Interest Rates
Lenders offer the best deals to new borrowers. So, if you’re an existing borrower, your lender might not offer you the same benefits. In such cases, transferring or refinancing your home loan can be a wise decision. Remember, even a 0.5% reduction in home loan interest rates can help you earn unexpected benefits.
Become Debt-Free Faster by Reducing the Loan Tenure
If you’ve taken a home loan for a long tenure and your financial situation has improved, consider refinancing it for a shorter tenure to save on EMI and remove the ‘debtor’ tag faster. Financial institutions usually allow you to make partial pre-payments of the loan whenever you want. They also typically offer the option to change your tenure/EMI. Otherwise, you can always opt for refinancing or balance transfer. Refinancing your home loan can help reduce your loan tenure by increasing the EMI amount. If the rates offered by the new lender are lower than your existing lender, you can repay the loan much earlier than the original tenure and boost your credit score.
Change Your Lender for Better Service Quality
Sometimes, borrowers complain that their lender is not customer-friendly. There’s a lack of empathy among customer service officers and company officials, they have poor communication skills, or they’re not flexible. Additionally, some lenders don’t offer flexible payment options or charge extra fees.
Get More Money
Building or buying a house is an expensive endeavor, and the risk of increasing costs is always higher. If your current lender refuses to provide additional funds, you can apply for home loan refinancing. Before asking a lender for extra funds, you should use a home loan eligibility calculator and check if your monthly income allows for the additional burden.
Before You Refinance: Key Factors to Consider
Refinancing a home loan should not be an impulsive or casual decision. It should be carefully considered, and all relevant factors should be evaluated before actually choosing the refinancing option. Here are some key factors that can influence your decision:
Financial Factors
Refinancing involves costs such as legal fees, processing fees, incidental charges with the new lender, prepayment charges with the existing lender. It’s better to do a thorough cost-benefit analysis before taking the leap. The decision should not be based solely on the lower interest rate. Refinancing should mean sufficient net savings till the loan is fully repaid.
Non-Financial Factors
Interest rate should not be the only factor influencing your refinancing decision. You should also consider intangible aspects such as brand name, reputation, customer-friendly policies, service aspects, document security, etc. The repayment rules and conditions specified by the new lender will also play a role in your decision. Another factor you need to consider is the timing of refinancing – at what stage of your loan repayment are you opting for refinancing, and what is the outstanding principal amount? Refinancing a loan that has been largely repaid (say 70% or more) may not be very prudent.
Factors that determine home loan interest rates:
Since home loan amounts are typically large, banks and housing finance companies thoroughly evaluate the applicant’s credit history, repayment capacity, income, and the value of the property being purchased. A home loan applicant should be aware of the factors considered by banks/loan institutions during the home loan application processing and whether they are eligible to apply. Note that while you may be eligible for a loan at a lower interest rate, the eligibility criteria may not be easy to meet.
Here are the factors considered by banks/loan institutions while accepting home loan applications and why some applicants are offered loans at lower interest rates:
Credit Score
– A credit score is a 3-digit number indicating the risk of lending to an individual.
– Those who have paid their EMIs and credit card bills in full and on time, and have not been overly dependent on credit, may have a good credit score.
– If your credit score is 750 or higher, you are more likely to get a home loan.
– Banks and HFCs determine home loan interest rates based on the applicant’s credit score. A higher credit score indicates that the applicant has paid their EMIs and credit bills on time, so many banks and HFCs offer home loans at lower interest rates to applicants with higher credit scores.
Note: If there are co-owners of the property, the bank/loan institution may check the credit scores of both, even if only one person is applying for the loan.
Income and Employment
Apart from credit score, banks/loan institutions also check the applicant’s income, employment type, and employer/company profile. Home loan applicants working in government or public sector undertakings or large and reputed private sector organizations are generally preferred by banks/HFCs due to their stable job and income. Therefore, banks and HFCs offer lower interest rates to such applicants. On the other hand, if you are self-employed or have an unstable job or have just started working, it may be difficult to get a home loan at a lower interest rate.
Loan Amount
The home loan interest rate can also be affected by the loan amount you want to borrow. Home loans up to ₹30 lakh can be availed at a lower interest rate. If you want to get a home loan at a better rate, try to make as much down payment as possible. This will not only reduce your loan burden but also help you get a lower interest rate on your loan.
Type of Home Loan
The interest rate on home loans also varies depending on the type of home loan. Regular home loans have standard rates, while plot loans or NRI home loans have higher interest rates.
Lower Interest Rates for Female Applicants
Most banks offer a 0.5% discount on interest rates to female applicants. Therefore, it is advised that married couples consider taking a joint home loan and make their wife the primary applicant to avail of the interest rate discount. Taking a joint home loan will not only improve your home loan eligibility but also increase the tax benefits on your home loan.
Type of Interest Rate
As mentioned earlier, home loan interest rates come in three types – fixed, floating, and hybrid. The bank/loan institution will offer you an interest rate based on the type of interest rate you choose for your home loan. In the case of fixed-rate home loans, the EMI remains the same throughout the loan tenure. On the other hand, floating rates change according to changes in the repo-linked lending rate (RLLR). Hybrid loans have a fixed interest rate for a certain period and a floating interest rate for the remaining tenure. You need to decide which interest rate to opt for based on the current market situation and future predictions.
Conclusion
Home loan refinancing can be a smart move to reduce your EMI burden, save on interest rates, and enjoy better loan terms. However, it’s crucial to carefully evaluate the financial and non-financial factors involved, including costs, credit score, loan tenure, and lender reputation. By doing so, you can make an informed decision and maximize the benefits of refinancing. Refinancing your home loan is a great way to reduce liabilities and get more benefits. Ensure you check the refinancing fees and costs before submitting your application. Choose a reliable financial institution and get the lowest interest rates, longer tenure, and more responsive customer support.
FAQ Related to Home Loan Refinancing
Q1: What is home loan refinancing?
A1: Home loan refinancing is a process where you transfer your existing home loan to a new bank or financial institution and often get a new loan at a lower interest rate or better terms.
Q2: Why should I refinance my home loan?
A2: Refinancing your home loan can help you get a lower interest rate, reduce your EMI, and increase or decrease your loan tenure.
Q3: Who is eligible for home loan refinancing?
A3: To be eligible for home loan refinancing, you need to have a good credit score and a history of timely EMI payments on your existing loan.
Q4: What is the process of home loan refinancing?
A4: The process of home loan refinancing involves getting your loan details from your existing bank, applying to a new bank or financial institution, and submitting required documents.
Q5: What are the charges for home loan refinancing?
A5: There may be charges for home loan refinancing, such as processing fees, legal fees, and other charges. You should check with the new bank or financial institution for details.
Q6: How long does home loan refinancing take?
A6: Home loan refinancing can take time, typically 2-4 weeks, depending on the new bank or financial institution and your documents.
Q7: Will home loan refinancing affect my credit score?
A7: Home loan refinancing does not affect your credit score, but if you don’t make timely payments on your loan, your credit score may be affected.
Q8: Can I increase my loan amount with home loan refinancing?
A8: Yes, you can increase your loan amount with home loan refinancing, but you need to get approval from the new bank or financial institution and meet their eligibility criteria.
Q9: What documents are required for home loan refinancing?
A9: The required documents for home loan refinancing include your existing loan documents, income proof, employment proof, credit score, and property documents.
Q10: Do I need to visit the new bank or financial institution for home loan refinancing?
A10: No, you can also apply for home loan refinancing online or over the phone, but you need to submit documents and stay in touch with the new bank or banks representatives.
