Home loan refinancing revolves around getting a new loan from a lender other than the original to repay the existing loan. You should always use a home loan EMI calculator before opting for refinancing. But people often wonder about some good reasons to refinance their home loans. Check out some top reasons to opt for home loan refinancing.
1. Minimised Interest Rates
A significant reason behind home loan refinancing is finding a lender offering reduced interest payouts. Home loans are often subject to floating interest rates that vary depending upon the macro rate in the national economy. But some lenders stick to the initial rate even after a decrease in the market rate.
Sometimes lenders take too much time to change the interest rates. At other times, lenders don’t reduce the rate as per the reduction in the base rate. In such situations, moving to lower interest rates help in minimising interest payouts as well as monthly EMIs.
Interest-only Home Loans
Several banks offer an interest-only home loan facility to borrowers. The facility can be leveraged by both new and existing customers of home loans. The facility enables a borrower to pay only the interest on the principal outstanding amount for a limited period during the loan tenure. No principal amount is deducted during the ‘interest-only period.’
2. Top-up Loan Facility
People often opt for refinancing as it helps them obtain an incremental loan at prevailing interest rates. Suppose a borrower took out a home loan of Rs. 50 lakhs to afford a property amounting to Rs. 60 lakhs. After paying the EMIs for a few years, the loan amount left is Rs 30 lakhs.
But maybe the value of the property has appreciated to Rs. 80 lakhs over the years. It implies that the borrower is capable of applying for a loan of Rs 50 lakhs. But for that, the remaining Rs. 30 lakhs needs to be paid off.
The borrower can transfer the outstanding loan amount to a new lender in such a situation. After that, the borrower can get a top-up loan at a reduced interest rate.
3. Change the Type of Interest Rate
Home loans can be taken at fixed interest rates or floating interest rates. A borrower opts for refinancing when they want to change their previously chosen type of interest rate. For instance, the borrower is stuck paying a fixed rate while the base rate in the economy has reduced considerably. A borrower will benefit from a home loan refinancing in such a situation.
4. Improvement in Credit Scores
A significant boost in the credit scores of the borrower can help them get a better interest rate after refinancing. Even an increase of 20 points in your credit score can help you save a lot on interest payouts. Regularly monitor your credit score and keep finding ways to improve it.
5. Change the Loan Tenure
Sometimes people opt for refinancing to shorten the tenure of their loan. An increase in income can help you afford higher monthly payouts. It will help you remove the burden of a home loan from your shoulder more quickly. The loan tenure can also be reduced by prepaying your loan. However, you might need to pay prepayment charges.
Ending Note
You should apply for home loan refinancing only after careful consideration. Refinancing has several benefits, but you have to fill out a new home loan application. You will also have to pay various costs similar to those you paid while getting the original loan.
