Planning to Refinance Your Home Loan? Here are 5 Things to Consider

Posted on: Apr 21, 2022 | | Written by:

Planning to Refinance Your Home Loan? Here are 5 Things to Consider

Homeowners who are finding their current home loan an enormous burden can think of refinancing their home loan. People generally opt for home loan refinancing to restructure their home loans. You get a new tenure and revised interest rate, etc., among other benefits. One example of restructuring would be when you want to pay off a part of your home loan, or you may also want to increase the tenure of the loan to pay a lower EMI. This is possible when you refinance your home loan. Irrespective of whether you are planning to refinance your home loan, it is advisable to secure your residence with a home insurance policy that will provide coverage against loss due to fire, flood, theft, natural calamities, or any unforeseen events.

Now let us look at factors to consider before going for home loan refinancing

1. Financial Factors

Going for a home loan refinancing involves costs, legal fees, processing fees, incidental charges with the new lender, prepayment charges with the existing lender (if you have taken a fixed rate home loan), etc. Therefore, you would do well to make a thorough cost-benefit analysis before leaping. The decision is not just about a lower rate of interest. Refinancing should mean a substantial net saving when the loan is repaid in full.

2. Choose the Right Lender

If you are planning to restructure your home loan, don’t just randomly choose any lender you come across. It is advisable to do some research and find a lender who offers you the best benefits. Also, ensure that the lender doesn’t levy high prepayment penalties on you.

3. Implications of refinancing on income tax

Payment of interest on your home loan is deductible from your income. However, paying EMI at a lower interest rate translates to lower interest deductions from your income. As a result, you may have to pay higher taxes. Therefore, it is wise to consult a financial advisor before planning your home loan refinancing.

4. Interest rates – fixed v/s floating

Floating interest rates change as per market fluctuations, while fixed interest rates rarely fluctuate and remain permanent. Lenders offer borrowers a choice between fixed rates and floating rates. Before refinancing your home loan, conduct enough research to know which benefits you more in the long run, depending on current economic conditions. You can also have a fixed interest rate for a few years and then shift to floating rates.

5. Interest rates and loan tenure

Interest rates and loan tenure are two significant reasons borrowers refinance their home loans. Your refinancing requirements should be on the basis of interest rates and loan tenure. Interest rates and tenure directly influence the EMI you pay. When refinancing, you can either opt for a shorter tenure and pay higher EMI or extend your tenure and pay lower EMI, but with more interest.

Conclusion

Home loan refinancing is advisable when the new lender offers a lower interest rate, permits a reduction in loan tenure, EMI, switches from fixed to floating interest rate, and offers better terms and service. However, it is not wise to restructure your home loan when you are nearly through with your loan repayment. Hence, it is advisable to do thorough market research and consult with finance experts before going for home loan refinancing.

Disclaimer: The above information is for illustrative purpose only. For more details, please refer to policy wordings and prospectus before concluding the sales.

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