Refinancing a housing loan means availing of funds from another institution to pay off your existing lender. The two common reasons you may choose to refinance are to take advantage of a lower interest rate or increase the borrowed amount. Moreover, there are other reasons why refinancing may be beneficial.
Here are five ways in which refinancing is beneficial.
- Interest cost savings
This is one of the major benefits of refinancing your housing loan. If you are currently paying a higher rate of interest, it would be beneficial to refinance the loan to another lender that offers a lower interest rate. This would reduce your total interest cost and also help to decrease the Equated Monthly Installment (EMI).
Several borrowers may opt to refinance their loan if the overall market interest rates are declining. Most lenders offer a home loan at a floating rate of interest, which means the interest decreases when market rates reduce and vice versa. However, some lenders may not immediately reduce the interest rate and may do so after a lag.
In such a situation, refinancing may seem beneficial. You will be able to avail of a lower rate in sync with the market rates. As a result, you may enjoy a lower EMI and a significant saving in the total interest cost.
- Shifting from fixed to floating rate and vice versa
One situation may be that you are paying a higher floating rate when compared to the fixed interest rate. Under the latter, the EMI remains constant for a specific period of time. On the other hand, you may be servicing the loan at a higher fixed interest rate. It is possible that the overall market interest rates have declined, which make floating rates more attractive. In both of these situations, you may benefit from switching from one rate to another to bring down the effective cost of your property.
You may need to pay some charges to your existing lender to refinance your loan. However, such charges most likely would be much lower than the potential savings on your interest cost during the loan tenure.
- Enhance the loan amount
When you choose to refinance your loan, you may be able to enhance the amount. This is known as a top-up facility, which is available at the prevailing interest rates. Lenders often provide additional housing finance based on the increase in the market price of the property. However, it is important to remember that refinancing through another lender is beneficial only if you are able to avail of a lower rate of interest. In case, this is not available, you may consider availing of the top-up facility from your current lender and save the refinancing charges.
- Improved customer service
Your current lender may provide poor customer service, such as lag in interest rate adjustments or delay in issuing loan statement. In such cases, it is beneficial to refinance your loan from another lender that provides better customer service.
- Change in your financial situation
When your income increases or decreases your capability to pay the home loan EMI changes. In case your income reduces for any reason, you may choose to refinance the loan for a longer duration to decrease the EMI. Alternatively, you may consider reducing the loan tenure if your income increases and save total interest.
Although refinancing your loan may have several advantages, you need to be careful. It is crucial that you understand all the terms and conditions and clarify the applicable charges before making the switch.