Introduction
You being here means you've embarked on the fulfilling journey of homeownership. Kudos to your courage and congratulations! If you are still in the market for securing a home loan, Credit Dharma can help.
However, do you dread looking at your monthly home loan EMI? Do you have to cut corners to ensure you don't miss an EMI? Have you ever wondered whether there's a better deal out there? Maybe there is, and that brings us to the topic of refinancing your home loan.
In India's dynamic housing market, refinancing your home loan can be a powerful financial tool. But it isn't a one-size-fits-all solution. Let's walk you through the facets of refinancing so you can decide whether it is the right financial move for you.
What Does Refinancing A Home Loan Mean?
Refinancing refers to replacing your current home loan with a new one, often with different terms but with the same lender. The objective is to secure better terms through loan tenure extensions, reduced interest rates, or modifying the EMI structure.
This is how it works -
- You approach your present lender and bargain to improve your loan conditions.
- The lender may listen to you and either reduce the interest rate or change other loan terms.
- You continue paying your lender but with updated loan terms.
When Does Refinancing A Home Loan Make Sense?
The key situations when refinancing home loan makes sense are:
- The opportunity to get a reduced interest rate
If there's an option to move to a lower interest rate, it saves you from paying a higher interest rate, AKA a high monthly EMI on your home loan. You get to save money for your other commitments.
- To switch from a fixed rate to an adjustable or floating interest rate
Have you opted for a fixed rate home loan? It may happen that interest rates start declining. In that case, you would want to switch to a floating or adjustable interest rate loan to save money.
If your lender permits this switch, you can refinance your home loan.
Please note that you can also switch to a fixed rate loan through refinancing if the market trends show rising interest rates.
- To reduce the home loan tenure
You may have opted for a long tenure when securing the home loan. But if your financial position has changed for the better, it would be wise to reduce the loan tenure and pay off the loan as soon as possible.
- To reduce the EMI amount
Your circumstances may have changed, and you may wish to lower your monthly EMIs. Refinancing your home loan might allow you to reduce the interest rate or extend your loan tenure.
- To borrow more
Refinancing unlocks the equity built up in your home and you can use this to avail additional funds for home renovations, or other major expenses.
Why Consider Refinancing Your Home Loan?
Home loan refinancing can be a strategic financial move offering several benefits:
- Lower monthly payments- If the interest rates have reduced since you took out your original home loan, refinancing may result in reduced monthly payments. You can use this extra cash flow to pay off other debts, improve your financial situation, or increase savings.
- Shorter loan tenure- Home loan payment can be accelerated by refinancing to a shorter loan tenure. Although this may result in higher monthly payments, it leads to significant savings on overall interest costs over the life of the home loan.
- Debt consolidation- Do you have several high-interest debts? They can be all consolidated into your home loan to simplify financial management. This can also potentially lower your interest payments.
- Access to home equity- A cash-out refinance allows you to borrow against your home equity. You can use this money for major expenses, such as debt consolidation, children's education, or home improvements.
- Improved credit score- If taking out your original home loan has improved your credit score, refinancing may help you secure a lower interest rate.
When Refinancing Your Home Loan Doesn't Make Sense?
Home loan refinancing offers potential benefits, but it may not always be the best financial decision. Take a look at some of the scenarios where refinancing might not be advisable:
- If you are nearly through with your loan repayment, it doesn't make sense to refinance your home loan.
- If the closing costs outweigh the potential savings from a lower interest rate, refinancing may not be worth it.
- If the plan is to sell your home in the near future, the cost of refinancing might not be covered.
- If your financial situation or credit score has worsened, you may not be eligible for better terms.
- If you are unhappy with your present lender, there's no point refinancing your existing home loan. Refinancing hinders you from taking advantage of offers from other institutes.
The Bottom Line
Home loan refinancing might be a strategic financial move, but it is critical to analyze your individual circumstances. If you have excellent negotiation skills and are absolutely sure your lender is offering you better terms than the terms of your original home loan, you may think of refinancing your home loan. However, if you are almost done repaying the loan and your financial situation has not changed, refinancing might not be the best option. Consult a financial advisor before making the final decision.
FAQs
- How many times can you refinance a home loan?
There's no limit on how many times you can refinance a home loan.
- Is it advantageous to refinance my home loan?
Refinancing a home loan might be beneficial if you are getting lower interest rates, access to home equity, the opportunity to consolidate your debts, and adjustable loan terms.
- Are there any alternatives to home loan refinancing?
Home loan balance transfer is an alternative to home loan refinancing. This is when you transfer your current loan from one lender to another in search of better terms and interest rates.
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