Mortgage refinancing means taking out a new mortgage loan to clear your existing home loan. Such a step can allow borrowers to take advantage of lower interest charges on offer from the other lender.
Through mortgage refinancing, borrowers paying a higher EMI can lower their monthly liabilities.
One usually opts for mortgage refinancing to get a new loan with a lower interest rate which cuts down the repayment amount. Here is an example to understand how mortgage refinancing works:
Suppose you have availed a Rs.30 lakh home loan in 2019. After repaying an amount of 8 lakh through EMIs, you have decided to opt for mortgage refinancing.
At present, the outstanding amount on your home loan is Rs. 22 lakh. After doing relevant market research, you have found a new lender (Lender B) who is providing home loans at a lower interest rate than your current lender (Lender A).
You can submit a mortgage refinancing application to Lender B, asking for Rs. 22 lakh as loan balance. After approval, Lender B will pay off your existing loan to Lender A.
Going forward, you will be required to make the remaining EMI payments to Lender B to pay off Rs. 22 lakh. However, the new loan comes with a lower interest rate which will significantly impact your EMI.
Apart from attractive interest rates, here are some additional features a mortgage loan refinancing facility comes with:
It’s true that choosing a longer repayment tenure means getting yourself into long-term commitments and contributing more towards interest payment. However, in the case of high-value loans, at times it could be necessary to go for a long loan tenure to reduce the EMI burden. This is one of the facilities you get when you refinance your mortgage loan.
Mortgage refinancing involves applying for a mortgage loan, mostly with a different lender, at lower interest rates to clear your existing loan. Opting for refinancing could reduce your EMI burden due to a lower interest rate. This could help you save on interest payments that you were earlier paying against your existing mortgage loan.
The primary reason to apply for mortgage refinancing is to close existing mortgage loans. You could be paying a higher interest rate on your existing loan, thus increasing your EMI burden. Refinancing would allow you to pay off your loan. Also, the EMI burden would be considerably less for your new mortgage loan.
If you are thinking of refinancing your mortgage loans, you should know the different types to know which will be suitable for you. The following are the three primary types of mortgage refinancing options available:
If you are considering refinancing your mortgage loan, you can go through the following steps:
Also Read: Home Loan Tax Benefit Calculator
This is the procedure every borrower has to go through to refinance a mortgage loan:
One should look out for penalty charges associated with this process before going ahead. Along with that, calculating the total charges applicable is also necessary to ensure that you are making substantial savings by availing of this facility.
Some of the reasons how mortgage refinancing can help you have been discussed in detail:
Even though there are no such disadvantages of going for a mortgage, there are some aspects you should consider to maximise savings. One of these key aspects includes the residual tenure of your existing mortgage loan.
Going for this facility during the later stages of the repayment tenure does not make sense as there will be no scope for interest cost savings. So, making such a decision towards the end of your loan tenure will inevitably be disadvantageous for you.
As mentioned earlier, there are certain eligibility parameters lenders ask for when you approach them for a mortgage loan refinancing. One of those criteria includes the credit score. Having a clean repayment track record and a high credit score automatically increases the chance of getting low-interest rates.
However, you must know that multiple inquiries regarding the CIBIL score generally have a negative impact on it. As per financial advisors’ recommendations, you should not approach way too many financiers at the same time.
That said, the mortgage refinancing facility enables borrowers to increase their credit score. With reduced EMIs, it becomes easier to repay loans on time. This automatically improves the credit profile.
You should consider the following points before opting for mortgage refinancing:
There are some other ways to reduce your equated monthly instalment amount, such as negotiating for a lower interest rate and restructuring the loan with the current lender. However, when you go for mortgage refinancing, you could get a top-up loan facility as well. Due to its no end-use restrictions feature, you can utilise these funds to meet any kind of financial requirement.
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Ans: Yes, this is one of the perks of a balance transfer facility. In case you have more than one loan with different lenders, you can consolidate them into a single one with this facility. However, make sure you have a good credit profile, and other financiers will not impose penalty charges for transferring the loan.
Ans: Generally, applicants need to submit certain personal documents such as PAN/Aadhaar Card, address proof, bank statements (past 3 months), latest salary slips, IT returns, etc. Additionally, lenders also ask for documents related to the concerned property.
Ans: An individual looking to claim a PMAY subsidy can do so after home loan refinancing. The procedure to apply for PMAY would be the same as in normal circumstances. The borrower will need to notify the lender and fill up a PMAY application form to receive subsidies.
Ans: There are several charges that a borrower must bear when opting for a home loan balance transfer. Some of the primary expenses include inspection fees, application fees, processing fees and administration charges. Keep in mind that you will need to pay certain charges to the new as well as the existing lender.
Ans: You can initiate a balance transfer as many times as you prefer. However, you must keep in mind that transferring your outstanding balance is only beneficial at certain stages of loan repayment. At other times, the cost of refinancing can be higher than the actual interest savings.
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Disclaimer: This article has been prepared on the basis of internal data, publicly available information and other sources believed to be reliable. The information contained in this article is for general purposes only and not a complete disclosure of every material fact. It should not be construed as investment advice to any party. The article does not warrant the completeness or accuracy of the information, and disclaims all liabilities, losses and damages arising out of the use of this information. Readers shall be fully liable/responsible for any decision taken on the basis of this article.
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