As a home loan is a long term loan, it can sometimes be a bumpy financial ride. The reason can be a high interest rate of your bank, unpleasant experience with the bank, or any other. Luckily home loans can be refinanced any time as per the preferences of the customers. Let us look at various aspects of home loan refinance and best reasons why one should opt for a home loan refinance.
Understanding Home loan Refinance:
Before getting into the reasons why one should refinance a loan, it is imperative to understand what loan refinance really means. Refinance as the name suggests is opting for a new financial scheme or loan after closing the existing loan. In simpler terms, refinancing a home loan means closing out the current home loan before its tenure with the money from a new loan which is taken under a set of new terms and conditions. It is also known as balance transfer.
There are various reasons why users opting for home loan refinance. Some of the best reasons to opt for a home loan refinance are as discussed below.
- Falling interest rates: Falling home loan interest rates is a good idea to opt for a home loan refinance. For someone who had taken a home loan at a higher interest rate, the home loan EMI would be substantially higher compared with a similar loan taken today at lower interest rates. In case the economy has improved and home loan interest rates have dropped considerably, it makes sense to foreclose the old loan by opting to refinance the home loan with a bank that offers considerably lesser rate.
It is however essential to keep a track of all calculations that cover the costs of facilitating the new loan like processing fee, bank charges, loan administrative fee while making sure that such costs do not offset the advantage offered by lower interest rates. In case your home loan has a prepayment penalty, make sure that interest rates have fallen substantially to cover for any such penalty payments for foreclosing the home loan.
- Switching from fixed to floating rate of interest: Interest rates for home loans keep fluctuating as per the economic and market dynamics. Fixed home loan interest rates once very popular have been almost invisible in the last few years. Now with an improvement in economic parameters and dropping inflation, fixed interest rates home loans are making a comeback of sorts.
For people considering opting from fixed to floating or vice versa, home loan refinance is a great way to make sure they can adopt to their preferred interest rate method allowing them to save money of payment towards interest rates for the home loan.They can opt to a lesser fixed rate with another bank if it is available.
- Unable to pay home loan EMIs: One of the common reasons why a lot of home loan users opt for loan refinance is when they face difficulty in paying the home loan EMI.
Let us assume that an individual took a home loan at a floating interest rate. While the interest rates were lower, he was able to pay the home loan EMIs without fail. Now with an increase in interest rate, the EMI gets increased automatically and the borrower funds it difficult to pay monthly installments, home loan refinance can be a good idea. Banks usually help such home loan refinancing requests by increasing the tenure of the home loan.
In such cases, refinancing will not be from one bank to another, but considering it as a new application with the same bank. A longer tenure effectively reduces the monthly EMI the borrower needs to pay to the bank every month. Hence the loan gets refinanced to a new loan with longer tenure period making it possible for the borrower to pay lower EMIs rather than defaulting on higher EMI loan. There is however a downside of getting home loan refinanced with a long tenure as it may mean paying more towards the total cost of ownership of the home compared to the earlier loan.
- Flexible Norms: If suppose you are looking for home improvement loan for some interior works, or a top up loan. Your existing bank is offering you a lesser quantum of loan due to their strict norms, whereas, the bank in which you operate your salary account is more flexible here. You can opt for a refinance of your entire home loan to the new bank, and get more quantum of money for your requirements.
One can also get a better interest rate owing if you have an improved credit score by this time.
Increase or Decrease in Income: Any increase or decrease in your income effectively plays a direct role in home loan repayment. In case your monthly income has decreased due to any reason or other financial obligation, refinancing a home loan with a longer tenure is a good idea to reduce EMIs. On the other hand in case you are in a better financial position compared to when you had taken a home loan, it is a good time to opt for home loan refinance and reducing the tenure thereby increasing your EMIs making sure you finish your home loan sooner.