Go for home loan refinancing when rates are low, tenure long

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With home loan rates near rock bottom, is it a good time to refinance your home loan? Let us take a look by first understanding what home loan refinancing is. Refinancing a home loan means paying off a current home loan and replacing it with a new one.

The new loan can be availed with the same lender or from a new one. In this process, the old loan is closed and you can start payments on the new one. A loan with good payment terms helps you increase long-term savings on interest.

For instance, a loan of 50 lakh at 8% for 20 years accumulate interest of about 50.4 lakh. But if this loan is refinanced at 7%, the interest will fall to around 43 lakh, ensuring savings of nearly 7 lakh, which you could use to fulfil other financial goals such as travel, buying a new vehicle or pursuing higher education.

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Looking at past trends, home loan rates have fallen at a slower rate. Loans from large lenders were priced above the 8.5% mark in 2018, rising marginally from the lows in 2017.

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Paras Jain/Mint

Then, bank loans were still benchmarked to the marginal cost of funds-based lending rate (MCLR). Following the Reserve Bank’s October 2019 directive, retail loans got cheaper. Home loans dipped below 8% for the first time. With the pandemic, the rates continued to fall, once even falling to 6.49%, as per BankBazaar Aspiration Index report.

Hence, there are many reasons why homeowners should refinance their home loans.

First, when there’s a significant delta (difference) in the rate on your existing loan and the rates being currently offered in the market, it may be time to consider refinancing. “The impact of the delta varies from one borrower to another. But in most cases, a difference of more than 50 basis points warrants a look at your loan options because you are paying a much higher rate than you need to,” said Adhil Shetty, chief executive officer, BankBazaar.com

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Second, when there’s substantial time left in your loan, a refinance makes more sense, as interest compounds with time.

It would be ideal to go for refinancing your home loan in the first half of the loan tenure. As you get closer to the end of your tenure, the refinancing becomes less beneficial.

Third, when your credit score or income profile has improved, it will allow you to get better loan offers.

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Shetty said, “You may have borrowed at a much higher rate while your income was unsteady, and your credit score was low. If this is no longer the case, and if your credit score is above 750 now, loans will be available to you at much better terms.”

Fourth, beyond the interest rate, look at other parameters. A home loan is a long-term relationship with the lender. Difficulties in the relationship need not become long-term problems. The difficulties can arise from issues such as customer service, lack of digitized account management, which is troublesome in a pandemic, or difficult pre-payment terms such as having to pay a minimum of 2-3 times the equated monthly instalments.

Fifth, when the costs of refinancing permit it, you should consider it. “It’s cheaper to refinance with your own lender and involves little to no paperwork,” said Shetty.

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Refinancing with a new lender involves paperwork and costs such as memorandum of deposit of title deed, processing fees and legal fees.

When the costs pay for themselves in the short term, refinancing is to your benefit.

Hence, if you are likely to consider combining the above factors in your refinancing decision, weighing your loan options along these parameters can help you arrive at a well-thought-out decision.

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