Buying a house can be an arduous process. The home loan interest rate is what, usually, clinches the deal. Sometimes, your finances at the time of taking a loan can change. At the time of taking the loan, your funds were limited. However, now, you might also have funds to decrease your debt burden. Or, the opposite can also be true. Your income sources have dried up, and you need to reduce your EMI further with a long tenure. You don’t want to have the debt obligation dangling on your head. One option is refinancing your loan.
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What Is Refinancing?
Refinancing a loan means that you want to convert your existing debt obligation to another debt obligation that has different terms of the loan. The required documents for a home loan may have terms that are more favourable for your financial situation.
When to Refinance the Loan?
The point of refinancing is to increase the principal amount and lower your EMI burden. Your lawyer or CA will advise you to refinance the loan when:
· Your financial income is not enough to meet your debt burden
· There is an increased need for money, and you do not have an income source to meet the additional burden
· Your daily expenses have increased thus reducing your ability to repay the EMI
· There has been a decrease in overall interest rates in the market, but it is not reflecting in your work
Refinancing a loan is not recommended for everybody. For example, if there are only six months left to complete your loan tenure, the processing fees and other charges may outweigh the positives of a lowered EMI.
Steps to Refinancing your Loan
The steps you will take to refinance your loan are similar to the steps you would have taken at the time of getting your initial loan approved. Apart from a focus on Home Loan interest rates and therefore the EMI, there are several other things you need to consider.
Let’s look at some of the steps
Identify your Interest Rate
The first thing that you can do is identify the interest rate that will reduce your EMI burden. For this, you’d have to understand the current debt market and the various options available for your loan range. Look at the interest rates offered by other banks and use online EMI calculator to understand the duration for which to extend the loan and refinance loan amount.
Negotiate your terms and conditions
Instead of heading to another lender, first, negotiate the terms and conditions with your lender. Your loan amount is already approved, and relevant documents submitted. It will save you the time and effort to move to another lender.
Get your documents ready
If you are shifting to another lender, make sure you have all the documents that the bank will require to submit.
You must consider the closing mortgage costs involved in refinancing. Also, work out the annual savings with the closing costs and the new interest rates. If the present value is positive, then refinancing is worthwhile.
Finalising a Decision
Refinancing is a great way to reduce your debt obligations. However, you need to understand the terms clearly before refinancing.