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.
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