Four Good Reasons To Refinance Your Home Loan

Ashwini Dutta has a home loan of Rs 40 lakh that he availed at an interest rate of 11.25%. The tenure of his loan is 15 years. After making payments for 3 years, he wants to refinance his home loan for the remaining tenure at an interest rate of 10.50%. Will this be a wise decision? Let us check out.

Refinancing one’s home loan essentially means that a new loan is being taken to pay out your existing mortgage. Here are four good reasons why refinancing could be a good idea.

Interest rate is crucial.
This is the key factor to be considered while refinancing one’s home loan. 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 long run.

Switch from floating rate to fixed rate of interest benefits you.
If you are currently on a floating rate of interest and getting the chance of refinancing at a lower rate, you may want to lock yourself in the low fixed rate. This will protect you from interest rate fluctuations that happen due to the impact of macroeconomic factors.

Refinancing can shorten your loan tenure.
The loan tenure is inversely proportional to the EMI payments you are making. This means the higher the tenure, the lesser the amount of your EMI and vice versa. If you have had a substantial jump in your salary because of a job switch, promotion, etc., you can choose to refinance your mortgage for a shorter tenure and increase your EMI. However, this should only be done if your EMI outflow is less than 50% of your monthly income.

You can deploy money elsewhere.
If you are planning to make another investment or start a business, cashing out on some of your home equity could be a wise financial move. If you are the kind of person who can manage your debts responsibly, refinancing your home loan can really pay off well.

Refinancing your mortgage will save you money, but one should not forget that refinancing comes at a cost. There are two parts to the cost of refinance. First, there is the pre-payment penalty, which may be 1% for a public sector bank and up to 3% for private sector banks. The loan processing charge of the new bank is the second part of the cost that should also be considered as a high processing fee may make the new loan quite expensive. 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.

Rajiv Raj is the Director and Co-Founder of www.creditvidya.com
Image: ThinkStock
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