Summary: Refinancing your home loan refers to a process where you switch to a different lender for lower home loan interest rates. read on to find out the pros and cons of doing so.
Refinancing a home loan is beneficial for multiple reasons. It lets you save on the interest expenses of a home loan and get more favourable loan terms.
The best home loan in India provides features like low interest rates, an extended repayment term, minimal documentation, relaxed eligibility, and others. If your existing home loan provides fewer features, you may refinance your loan to save money.
However, there are a few drawbacks to home refinancing. For instance, the closing costs might be quite high, and the savings might be minimal if the loan amount is significantly high or the term is extended.
The following are the top pros and cons of refinancing a home loan in India.
Home Loan Refinance – The Pros
Here are the top benefits of home loan refinancing.
A Decrease in Interest Rate
Home loan rates in India are dynamic. So lenders can decide the rates themselves. However, you can change your lender if you feel your current lender charges a higher interest rate than other lenders.
Moreover, you can claim an additional discount on the interest rate if your credit score is over 800.
Since home refinancing decreases the interest rate, you can reduce your repayment term and become debt-free earlier. Alternatively, you may increase the tenure to reduce your EMI.
Modify Loan Features
By moving to a new lender through a home refinance, you can get better features on your loan. For instance, if the interest rates have steadily increased, you may get a fixed-rate loan from your new lender.
A fixed-rate loan saves you from the ill effects of ever-increasing home loan rates in India.
Include or Exclude a Co-Borrower
If your existing loan is with a co-borrower, you may exclude them from your refinanced home loan. Excluding a co-borrower is imperative if you do not share a good rapport with them.
Also, you can add a co-borrower to the refinanced loan if your existing home loan does not have one.
If your co-borrower has a better credit profile and higher income, you can get a good deal and the best home loan in India.
Home Loan Refinance – The Cons
Despite the positives of home loan refinancing, there are a few negatives.
Closure and Processing Fee
When you decide to refinance your loan, your existing lender may charge a closure fee. Moreover, your new lender will charge a processing fee.
The total cost of closure and processing might be between 5% and 10% of the outstanding loan amount.
It is wise to calculate the net cost of a home refinance before signing on the dotted line.
Your Credit Score Gets Affected
When you apply for a home refinance, your lender will fetch your credit report from a credit rating bureau like CIBIL. Such inquiries are known as hard credit inquiries.
A hard credit inquiry remains on the borrower’s credit report for at least two years. Moreover, it may decrease your credit score slightly. Although a drop in the credit score is unavoidable, it will improve when you make timely repayments.
Your credit score can be impacted by your loan term and amount, as well as other factors related to borrowing and repayment behavior. A longer loan term can result in higher interest payments over time, potentially affecting your credit score.
Opting for a larger loan amount may also increase your debt-to-income ratio, which can negatively impact your credit score. Additionally, late payments or defaulting on a loan can significantly lower your credit score.
It is important to carefully consider your financial situation and borrowing habits to maintain a good credit score and improve your chances of obtaining favorable loan terms in the future.
The Effect on the Loan Term or Amount
Borrowers often increase their repayment terms when they opt for a home refinance. However, the interest rate may also increase when you increase your repayment term.
Alternatively, your new lender may offer you a higher loan amount if your credit profile is strong. But, a higher loan amount will increase your debt-to-income ratio, making it difficult to repay the loan or borrow more in the future.
The Effect on the Loan Term or Amount
The loan term and amount can have a significant impact on each other, as they are closely related in the lending process.
Loan Term: The loan term refers to the length of time that a borrower has to repay the loan. Generally, the longer the loan term, the smaller the monthly payments will be, but the total amount of interest paid over the life of the loan will be higher. Conversely, a shorter loan term will result in larger monthly payments, but the total interest paid will be lower.
Loan Amount: The loan amount is the total amount of money borrowed by the borrower. Typically, the larger the loan amount, the longer the loan term will be, to allow the borrower enough time to repay the loan. However, a larger loan amount may also result in higher monthly payments and higher total interest paid over the life of the loan.
Overall, lenders will consider both the loan term and loan amount when determining the borrower’s eligibility and interest rate. It is important for borrowers to carefully consider their financial situation and choose a loan term and amount that is manageable and fits within their budget.
Conclusion
Although home refinancing may provide you with the best home loan rates in India, it is wise to evaluate the pros and cons before deciding. You can benefit from a home loan refinance if your credit score is above 800 and your new lender offers better features.
However, it is wise to avoid a home loan refinance if the closing and processing charges are too high or your home loan is less than one year old.
It is good to note that the best home loan in India provides ample reasons not to refinance your home loan. Visit PNB Housing to get low-interest loans and fulfil your housing dreams conveniently.