During this period of economic uncertainty, refinancing a housing loan can create a breathing room for borrowers by lowering monthly payments and helping them save money in the long run. When you refinance a home loan, it means that you are taking out a new loan on the property. In most cases, this is done for the remainder a borrower owes. Typically, the new loan comes with better terms than the previous one. This depends on factors, including how much equity the applicant has in the house and credit score at the time of application. While refinancing a housing loan sounds lucrative on paper, it may not necessarily enhance your position. It is always a wise idea to weigh the pros and cons based on your situation.
Pros of Refinancing Your Home Loan
Home Loan Transfer Locks In a Better Housing Loan Interest Rate
Housing loan interest rates are at a historic low right now. Therefore, it may be a good idea to refinance your existing home loan with a better interest rate. This will be particularly beneficial if the new rate is significantly lower. If you have bought the home last year, the refinanced rate may not be low enough to entice you to go via the refinancing route. But if you got your initial mortgage a decade ago, you may find that a new rate would be low enough to save you tens of thousands of rupees.
Home Loan Transfer Lowers Monthly Payments
When you refinance your housing loan and get a new rate, you can cut down your monthly payments. Let us assume you have 15 years left on first housing loan, and you do a home loan balance transfer with a lower rate and opt for a 15-year term. Your payment is expected to go down. If you refinance your loan into a 20-year term, you are going to save more every month as you are spacing out the same loan principal over a relatively longer period.
Home Loan Transfer Pays Off the Loan Sooner
Let us say that the original term for your housing loan term was 30 years, and you still have 20 years left. If you refinance your housing loan into a 15-year one, you would now be able to pay off your housing loan five years earlier. Refinancing in the shorter term saves thousands of rupees. Not only are the rates low right now, but lenders charge lower rates for shorter tenors. Plus, if you get a term that is five years shorter, it means that you will not have to pay interest for five extra years.
Home Loan Transfer Taps into Home Equity
If you have gained equity in your home from the time you had bought it, you may decide to apply for a special form of refinancing: a cash-out refinance. With a cash-out refinance, the applicant can take out a housing loan for more than the amount they owe. This way they can use their home’s equity for other purposes, including paying debt or home improvements. A cash-out refinance permits borrowers to accomplish other financial goals and there is no restriction in terms of how one can spend the money.
Cons of Refinancing Your Home Loan
Housing Loan Transfer May Make You Pay Closing Charges
Just as with your original housing loan, you will be required to pay a closing cost if you refinance. Closing costs include legal fees, appraisal, and loan origination fees.
Some lenders may promote “no closing cost” refinancing, but you may still have to pay for such expenses with time. Instead of paying them when closing, you will either have to pay a higher interest rate or extra every month to make up for the difference.
Home Loan Transfer May Mean Higher Home Loan EMIs
Refinancing into a shorter-term mortgage is a great way to pay off your housing loan sooner. However, this may also mean a higher home loan EMI. If you have 20 years left on your housing loan and you refinance it to get a 15-year term, for instance, you will be cramming the same housing loan principal for a shorter period. As a result, you will have to pay more each month to repay the same amount faster. But your monthly payment will not go up if you refinance your housing loan into either the same or a longer term.
Home Loan Transfer May Increase Your Term Length
If you have 20 years left on your housing loan but need more time, you can refinance into a 30-year housing loan. Now, you get a decade more to repay your housing loan. As a result, your housing loan EMI is expected to be lower. Adding a decade more to a housing loan means that you will pay interest for another than 10 years, which is likely to cost you thousands of rupees in the long run.
The Final Word
Housing loan transfer or refinancing is advantageous as it reduces EMIs, helps borrowers save on the total interest outgo, and increase their credit score. However, you must ensure that the pros are outweighing the cons before you decide to make an application. Considering parameters like interest rates, residual home loan tenure, transfer costs and services, will help you make the right decision regarding housing loan transfer or even a top up loan.