Refinancing a loan refers to taking out another loan from a different lender in order to pay off an existing loan. Although it is referred to as refinancing, it also acts as a replacement of the loan with another one that may be more beneficial for the homeowner. You may have several reasons to refinance your home loan - it could be because the new loan offers a reduced interest rate, or to top up their existing loan. In this article, we discuss all the reasons why home loan refinancing may be required.
In this list, we discuss five of the major reasons to refinance your home loan. If you are considering refinancing your home loan, you must go through this list carefully and make such a decision after doing your due diligence.
Low House Loan interest rates are considered as the most important reason to refinance your home loan. If a homeowner comes across a loan provider offering a lower interest rate, they can choose to refinance so that they end up paying a smaller EMI amount each month and a smaller overall interest rate. This happens because interest rates are subject to changes as macro rates change in the economy. However, sometimes lenders will not pass on the benefits of lower interest rates to borrowers. So, it makes sense to foreclose such a loan and move to a lender offering a lower interest rate.
Fixed and floating interest rates have their own merits for borrowers. While a homeowner started out with a loan with a fixed interest rate, they may realise that it is beneficial for them to move to a loan offering a floating interest, and vice versa. If a borrower is paying a high floating interest rate, they may be inclined to move to a loan with a fixed interest rate as the latter ensures that their EMI amounts do not fluctuate too much over a period of time. On the other hand, should a borrower be stuck with a fixed rate home loan that attracts a high interest, they may wish to move to a fixed rate loan to avoid high overall interest rates.
An unexpected period of reduced income is a good reason to refinance your home loan online. Should you have to go through a pay cut, joblessness, if your source of income closes shut due to some unforeseen reason, it may become difficult to pay off your monthly EMIs. During these periods of hardship, it may become financially as well as mentally taxing for one to pay their EMIs. For this reason, they may choose to refinance their home loan and go for one with a longer repayment tenure and smaller monthly instalments for some relief.
Real estate is an area where prices fluctuate regularly. Assume that you purchased a property worth Rs. 50 Lakhs and took a loan of Rs. 40 Lakhs to fund it. A few years have passed and you have paid the loan with Rs. 30 Lakhs remaining. However, the price of the property has appreciated and now stands at Rs 1 Crore. Now, you can get a higher loan amount of up to Rs. 80 Lakhs on your property, but cannot avail it till you clear your outstanding Rs. 30 Lakhs loan. However, you can get the loan amount refinanced from another lender at a lower interest rate and get a home loan top-up of about Rs. 50 Lakhs at a similar interest rate.
In case your lender has been delivering poor customer service, it makes sense for you to refinance your home loan and move to a bank with a better customer service segment. For instance, if your bank’s customer service is slow to comply with the prevailing floating interest rates, it may make sense to refinance your home loan with a more prompt and customer focused lender.
Loan refinancing can give a new lease of life to your home loan. There are a range of great reasons to close one house loan and open a loan account with another, better suited one. However, one should only consider home loan refinancing if a change in interest rate brings down the overall amount owed in the long run.