We hope many are aware that home loan interest rates are at an all-time low for the last one-and-a-half years. Many lenders have reduced it and with some lenders it is below 7 % to as low as 6.5 %. This is an opportunity for existing borrowers to cut down their interest rates by refinancing their home loans. This seems easy, but we recommend that you should always consider some points before you take a call on refinancing your home loan. We hope this article will clear any concern pertaining to refinancing home loans.
What is Home Loan Refinancing?
For many this is something out of the syllabus. So here we are defining the refinancing which means settling your existing home loan by taking a new home loan with better terms, especially, aiming at a lower rate of interest. Refinancing by switching to a lower interest rate will substantially help you to save some money which you can utilize to invest somewhere else for fulfillment of other life goals. This will not help you to save some amount on EMIs, but also you can settle the entire loan amount faster. There are two ways for refinancing, one is approaching an existing lender and second is opting for a new one. In the latter, the costs are generally seen to be higher.
Current Interest Rate and Refinancing
Currently, home loan interest rates are lows which were never before. As per source, the lowest home loan interest rates stood at around 8.4 in 2019. At present many lenders are offering interest rates around 6.65-6.5. If you switch your home loan to a lower interest rate, it can reduce your interest rate which results in savings worth lakhs of rupees.
For example, a home loan of Rs. 50 lakh has interest rate of 8.5 % for 20 years will result in an overall interest payout of Rs. 54.14 lakh. The same loan at 7 % will result in Rs. 43.03 lakh –a clear-cut saving of 11 lakh.
There are more than 15 Banks, Home Finance Companies, and Non-Banking Finance Companies providing home loans under 7 % today.
Due to pandemic when incomes have been affected a lot across sectors, existing home loan owners can boost their financial status by refinancing. However, one should check on the pros and cons of refinancing before moving ahead.
Check Your Current Home Loan Tenure
The benefit you get out of refinancing from lower interest rates depends on the time left in your loan. Those who are in the initial phase of home loan are more likely to get the most benefit from refinancing compared to those who are in the last phase of home loan. This is because a major portion of your EMI in the initial years consists of interest rate. Hence, the sooner you go for refinancing, the higher the savings on interest rate will be. If you are in last stage of you home loan phase i.e. you are 2-3 years away from completing entire home loan, refinancing makes little sense or no sense at all because in last phase of loan, you are paying mostly principal and refinancing on lower interest rate will not be mostly beneficiary to you at this point of time. It is wise to calculate everything before you make any decision.
Cost Associated With Refinancing
Refinance is not freebies that you get without any cost. Some costs such as, processing fees for new loan, legal charges, MOD charges etc., are attached with it. So, it is wiser to evaluate this cost against the overall expected savings you may get during repayment. If the savings are more than cost, then it is worth considering refinancing.
Credit Score and Loan
Those who have credit scores higher than 750 are lucky to get the best interest rate; however, if you are considered for a higher interest rate due to a poor credit score, you may later switch to a lower interest rate once your credit score improves. A credit score of 750-800 or more will help you to crack the refinancing deal in your favor, and you can have better deals from new lenders or with your existing lender too.
One can go for home loan refinancing if they are not happy with their current lenders in terms of services. But remember this will only make sense when you have significant tenure left to make repayments. Before making a decision to switch to a new lender, check the cost involved and how much you will save.