Refinancing your home loan – What, why and when

What does refinancing mean?

Refinancing your home loan essentially means that you pay out your existing home loan before its tenure and replace it with a new one. It is an excellent tool to manage your debt load, reduce your financial stress while saving your money. It also ensures that you are not bound to one financial institution for the entire tenure of the loan.

Why must you opt for refinancing?

There are several ways that a new refinanced loan can help your family manage their monthly budget as well as long term financial goals. Below are the two primary reasons that you may want to consider refinancing your home loan.

1) Refinancing to lower your rate of interest

Interest rate is a crucial factor to consider when refinancing your home loan. Many people like to refinance when offered a lower rate of interest. Experts claim that if you are getting a difference of 0.75-1% between your existing rate and the rate of refinancing, you will end up saving money in the future.

Another consideration is moving from a higher floating rate of interest to a lower fixed rate of interest which will have a positive impact on your monthly savings and budget.

2) Refinancing to shorten your loan tenure

If you are looking to shorten your loan tenure, refinancing your loan is a good option. A sudden windfall or increase in income you may lead you to find that you can easily afford a lower tenure loan without any strain on your monthly budget. Refinancing your loan is wise in such a situation.

When you can opt for refinancing

While refinancing is your personal choices, there are certain times, when it is the best decision to make. Below are the situations, when refinancing will definitely benefit your monetary situation.

1) Change in your credit score

Borrowers who have a good credit history and CRISIL score can negotiate for favourable borrowing rates. If your credit score is much better than it was when you first got your home loan, it’s possible that you can refinance your home loan at a better interest rate.

2) Change in income

You many also want to opt for refinancing when you have a change in your income – either an upward increase to a lower revision.

3) Change interest rates

If current interest rates are substantially lower than what you pay on your existing fixed home loan, then refinancing your loan would be a wise financial decision for you.

Refinancing a home loan doesn’t pay off the debt, it just restructures it, often at a lower interest rate and a different loan term than the current mortgage. However before taking a decision on refinancing, one must consider the hidden costs- i.e. the pre-payment penalty, which may be 1% for a public sector bank and up to 3% for private sector bank and the new loan process charge. Refinancing your mortgage will save you money, but it can also be an expensive affair and one should undertake it only after ensuring that amount you save offsets all the settlement costs.

Instead of taking a hurried decision about a refinance, consider your options carefully and take a decision based on your abilities and your financial goals.