People prefer applying for a home loan and getting a lump sum amount for the purchase. Purchasing a house via a loan will not bring an immediate financial burden. The cost of the house can be returned to the financer in small amounts at regular intervals. By doing so, individuals can meet daily expenses even after purchasing their dream house. Sometimes, borrowers are not comfortable with their current financer. They might think of changing the lender and choosing one with better interest rates, communication, and other facilities. Many people prefer to refinance their home loans.
Read on to know things to consider before refinancing a home loan.
Understanding the concept of refinancing for home loans
In refinancing, the remaining home loan balance is transferred to a new lender. Also known as home loan balance transfer, refinancing allows borrowers to look for better deals. For example, let’s say a borrower has taken a home loan of 50 lakhs with an interest rate of 9%. The repayment tenure for the housing loan is ten years. Let’s say the borrower found a better deal after three years of repayment. However, another lender is offering interest rates of 7.50% on housing loans. In such a case, the borrower will transfer the remaining home loan balance to a new lender.
Besides better interest rates, someone can opt for refinancing due to lesser repayment tenure. Several factors can motivate borrowers to refinance their home loans. For example, some people may refinance their home loans because they aren’t satisfied with the customer service of the current lender. However, a balance transfer should not be initiated without proper research. The idea is to change the lender and make the loan less expensive. Otherwise, there’s no point in going through all the documentation hassles.
Things to consider before refinancing a housing loan
Refinancing of a housing loan should be initiated only after some benefits. Some things to consider before refinancing the housing loan are as follows:
Interest savings
Before changing the lender, calculate the overall interest savings. If the interest charges at the end of the housing loan tenure remain the same for two lenders, refinancing should be ignored. If the interest rate for a housing loan is lower, the overall interest charges will also be lower. After partial repayment of a housing loan, the credit score can improve. The borrower can be eligible for better interest rates as the credit score improves. A home loan balance transfer is a good idea in such a situation.
One should opt for refinancing early during the repayment tenure. It is because most lenders collect interest charges during the early stages of the loan. At the end of the loan tenure, they collect minimum or negligible interest charges. The borrower might save more on interest charges by changing the lender during the early stages. There’s no point in changing the lender when only a few home loan instalments are left. Borrowers can use a home loan interest calculator online to know the overall interest charges.
Residual loan tenure
Borrowers should look to reduce their repayment tenure by refinancing home loans. Similar to the interest rate, no effect on the repayment tenure will occur with refinancing the loan during the later stages. If a housing loan’s repayment tenure is higher, interest charges at the end of the loan will be higher. If the repayment tenure increases after changing the lender, refinancing should be skipped. Borrowers should look to reduce their EMI burden via a home loan balance transfer.
Renegotiation with the existing lender
After finding a new lender, renegotiation with the existing lender should not be ignored. Let the current lender know that you have found a better home loan offer. The existing lender might agree to reduce the interest rate or repayment tenure of the home loan. Lenders do so to retain their existing loan customers. Choose a better lender and refinance your home loan!
Conclusion
The home loan balance transfer feature has many benefits, like competitive interest rates, higher loan terms, and 24-hour customer support. A thorough investigation is required before you choose your new home loan financial institution. Choose the one that can give you the most savings in the form of the lowest interest rates and the best terms.
