Article

Refinancing Existing Loans
May 17 , 2013

Refinancing can be a nice way of saving big bucks when interest rates are falling. In India refinancing applies to home loans. Suppose you had a home loan of 11% and find that another bank offers it for 9%. If you had the option of switching banks and pay EMIs to the new bank for with lower interest rate, would you go for it?  That's exactly what happens in a refinance.

Refinancing involves paying off an existing loan by taking on a new loan with the same property as collateral. When you refinance the new lender takes on your loan by paying the original lender. The biggest reason why refinancing is attractive to borrowers is lower interest rate. Other reasons may be to avail loan of a shorter tenure, to switch from a fixed rate to floating rate or to reduce monthly payment amount by opting for a longer term loan with lower interest and fees. Whatever the motivation might be refinancing allows you to make good the mistakes you made in the first loan or to make a good loan even better!

How You Benefit

Refinancing can bring short term and long term benefits if done correctly. It gives you the opportunity to get a good grip over your finances if your previous loan was a mistake hastily or thoughtlessly done. The savings you make on the loan can be invested for a long term need as retirement savings, child's education and so on. When finances are strained paying out less each month on a refinanced loan can help meeting other day-to-day money requirements with lesser efforts.

However is the refinancing turns out to be a poor deal the only person to benefit would be the loan manager.

Should I Refinance my Loan?

When interest rates are low there is much flutter in the refinance arena. Now that prepayment penalty on floating rate home loans has been abolished one of the hindrance to refinancing has vanished. Yet refinancing may not make financial sense for all home loans.

Whether refinancing is right for you depends on two considerations. First of all think about how much money will be saved through the refinance. This is linked to the remaining term of your existing loan. Typically home loans have tenure of 15-20 years. If you have at least 15 years to go with the existing loan, an interest rate lower by even 2% will make a huge difference in savings. On the other hand if there are 10-12 years left not very big difference will be made in savings and if there are less than 8 years left even a 3% difference will not result in any sizeable savings. 

One reason why remaining loan term matters is because interest constitutes the bigger chunk of EMIs in the initial years and principal makes the bigger chunk in the final years. Apart from the remaining term the term of the new loan also determines how much you will actually save. In worst cases if the term of the refinance loan is longer you may end up paying more even with lower interest rate.

Secondly think of whether the financial benefits gained will be worth all the hassles and running around. There will be many formalities and procedures to be followed in making the switch. You are already familiar with what it means to apply for a loan and get it sanctioned. Refinancing will also involve the procedure of closing the previous loan. If you are a person too tied up with work and other activities you might not be able to sit down and figure out how much you will actually save and go through terms and conditions of the new loan. Refinancing might give you the best deal in this case.

In the end it all boils down to how much is saved. If you're considering a refinance calculate the total savings you will make after taking into account processing fees and closing fees applicable.

Conclusion

A good refinance will help you by lowering your interest rate and/or lowering the loan term. Since like in most financial transactions complexities can strip the careless borrower of potential benefits refinancing should be done hastily. Take time to visit your bank and find how much loan is outstanding and whether they are willing to offer you a discount in interest rate or switch to floating/fixed rate. This will be the best deal possible for you. If not get quotes from different banks for refinance and try to arrive at the aggregate savings deducting all charges involved. 

Fintotal Knowledge the best place to learn more on personal finance.

The language is simplified and written specially for non finance background individuals.


Explore more in a easy manner.

Table of Contents

Table of Contents

  • No Article Listed
  • No Article Listed
  • No Article Listed
  • No Article Listed
  • No Article Listed
  • No Article Listed
  • No Article Listed
  • No Article Listed
  • No Article Listed
  • No Article Listed

Get the all financial products under one roof only at

you will NEVER GO WRONG with us!

Unbiased . Best Deals . Appropriate Products . No Mis-selling