Home loan interest rates have dropped to new lows this year. In 2019, the lowest home loan rate was 8.40% and in 2021, the rates are known to be ranging around 6.49-6.95%. The falling interest rates allow homeowners the opportunity to improve their savings, especially in financially difficult times like the ongoing pandemic. This can be done by refinancing existing home loans.
While new home loan borrowers can avail of loans at low rates, borrowers with existing home loans may be paying higher interest rates. This is when r-comes into the picture. Refinancing your home loan can allow you to enjoy lower interest costs, smaller EMIs, and reduced home loan tenures. This means you can possibly get out of a debt burden sooner.
What is home loan refinancing?
Home refinancing involves two parts:
- paying off existing home loan
- taking a new home loan with a lower interest rate and better terms.
The new loan is used in repaying and closing the existing loan and can be sourced either from the same lender or a new one. The borrower can then start repaying the new loan with better payment terms that result in long-term savings.
Here is an example to understand how home loan r-works
Suppose you take a home loan of Rs. 50 lakhs at 8.00% for 20 years. The interest will therefore be Rs. 50.37 lakhs. If you refinance this loan at 7.00%, the interest burden drops to Rs. 43.03 lakhs, thereby resulting in savings of Rs. 7 lakhs.
When to opt for home loan refinancing?
Choosing the right timing for home loan refinancing can make all the difference in managing your debt burden. To allow easy decision-making, here we have put together different situations in which refinancing is advisable:
If your loan tenure is still remaining:
It makes sense to opt for refinancing in the early stages of the existing loan tenure. This is because the loan EMIs mostly comprise interest payments in the first half of the loan tenure. Therefore, using a r- option at this point will lower the interest burden and help in achieving savings.
If you are getting lower interest rates:
The largest component of a homeownership cost is often the interest rate. A home loan interest rate that is cheaper by approximately 50 basis points or higher can shorten the total loan tenure, lower the EMI burden, reduce interest payments, and result in larger long-term savings.
When you see improvement in your credit score & income:
A credit score of 750 or above combined with income stability can allow you to have easy access to the best home loan offers.
When the refinancing cost makes sense:
Refinancing comes with a cost. If the estimated savings from refinancing are higher than the costs, you should safely consider loan refinancing.
If you get better service:
Automated account management, easily approachable customer service, lower account management costs combined with the above-mentioned aspects make for a good case to opt for refinancing.
Who should consider home loan refinancing?
Consider home loan refinancing if you see yourself fitting in any of the below categories:
Eligible for lower rates:
If your current home loan rate is much higher than what’s been offered today, you should go for loan refinancing.
Those with high credit scores:
If your credit score is over 750, you could be eligible for better loan terms, therefore consider refinancing.
Read More: Tips to Keep Your Home Bee-Free
Prefer better benchmark:
Increasing number of home loan borrowers are starting to prefer repo-linked rates, especially those who have good income and credit profiles. Repo-linked loans tend to have transparent pricing. This helps borrowers to better estimate the rise or fall of floating rates.
Require smaller EMIs or longer loan tenure:
With a refinanced loan, you could pay lower EMIs as a result of lower rates. This can also mean an increased loan tenure that makes it easier for you to make a loan repayment.
Need manageable payment terms:
The loan terms can result in a higher cost of borrowing. For example, if you need to pre-pay a minimum of 2X EMI, it can result in higher interest outflow. This signals the need for refinancing.
To optimize your home Loan, you should go for refinancing. A home loan refinance helps you to enjoy better terms on a home loan as compared to the terms of an existing home loan.
However, before going for home loan refinancing, you must consider the total cost of such a transfer. If the net savings will likely be higher than the cost of the transfer, you can safely choose to refinance. Make the most of your home loans through refinancing as it can help you save funds in the long run.