What Is Mortgage Refinancing?
Mortgage refinancing is popularly known as a home loan balance transfer. If a person is looking to refinance a home loan and get a better deal, mortgage refinancing is the perfect solution for them. This option allows them to switch their mortgage loan from one lending institution to another. This is done to potentially secure a lower mortgage refinance rate or cash in on the value of one's home by refinancing.
Generally, the lender pays off one's existing mortgage for a newer one, and post this, the borrower may have only one loan EMI to pay. Refinancing their loan may also allow them to reduce their loan tenure.
Apart from this, it's possible to add or remove a joint name on the mortgage in specific situations. For example, if someone gets divorced or separates from the person they live with. It's also possible to refinance and add a new person's name to the loan at the same time.
Pros of Mortgage Refinancing
1. Loan Tenure Change
One of the reasons why someone may look to refinance a home loan is to reduce the loan tenure. The basic advantage of reducing the loan tenure is that there are savings on interest costs.
For example, a borrower may start with a 20-year loan but can now afford a higher EMI payment. So, he or she may refinance to a 10-year term to get reduced refinance rates and pay less overall.
On the other hand, also someone may have a liquidity crunch and may look for a lower monthly EMI payment and so would like to increase the loan tenure to reduce the monthly EMI amount.
2. Reducing the rate of interest
Refinance rates depend on different variables in the economy like inflation, RBI monetary policy actions and so on. If the refinance interest rate is better today than when the borrower took their loan, refinancing would be very beneficial for them. Reduced mortgage refinance rates can help a borrower to keep their monthly EMI payments low. Additionally, they will most likely pay a reduced total interest over the entire tenure of the loan.
3. Changing the Type of Loan
A fixed-rate interest loan is a great option for someone who may be in a situation where they need to borrow money but the floating rate of interest isn't right for them. A fixed-rate interest refinance home loan locks in the current rate of interest so there's no chance of it going up later on, which can be helpful if they don't know what the future holds.
Additionally, this type of loan may also be more beneficial if one is not planning on using their borrowed money for a long time - something that is often the case with balance loans.
4. Cashing On Home Equity
If the value of the borrower's home has gone up, they may have the means to take out cash for other purposes, such as home improvements or consolidating their existing debt or meeting other expenses.
In the case of a cash-out refinance, it can be helpful to have more money available to cover outstanding payments on an existing home mortgage and take advantage of lower mortgage refinance rates. Further, using cash from one's home allows the person to borrow money at much lower refinance rates than other loan types. A cash-out refinance deal can have tax implications, though.
Cons of Mortgage Refinancing:
1. Cost overruns over break-even
A refinance home loan may help to reduce the interest burden or generate savings but this comes at a price in terms of refinancing and closure costs. Sometimes these costs may overrun the savings and thus one may not be able to break even.
2. The time and effort may not yield equivalent rewards
Sometimes it may so happen that the time and effort required to go over the refinancing procedure may not yield the equivalent amount in savings, and could include substantial opportunity costs being incurred.
3. Increased monthly EMIs
If one opts to reduce the mortgage loan tenure through refinancing, their monthly EMIs would increase, sometimes putting a constraint on their expenses.
4. Lower home equity
In the case of cash-out refinancing, one can borrow against their home, reducing the home's equity.
How Does Mortgage Refinancing Work?
The refinancing or the home loan transfer process generally takes a lesser amount of time as compared to the new loan application.
Mostly this is completed in 20-20 days.
Tips for Choosing a Refinancing Package
- Beware of toxic mortgage charges like arranger fees, insurance charges etc., since these cost items can eat up the interest savings from the refinancing deal.
- Select the right financier by checking their rating with the rating agencies, various filings on the RBI websites etc.
- Always be updated on all the economic news and announcements from the RBI concerning the rates of interest through its Monetary Policy review meetings. This would help to compare and evaluate the home refinance rates to decide on whether to go with the refinance option or not.
How to Increase One's Home Loan Eligibility?
Maintaining a good credit score through regular on-time repayments and also limiting overall credit usage can increase the possibility of qualifying for a better and higher-value home loan.
The Process of Applying for Mortgage Refinancing
1. Application process
The application process would start with the evaluation of various options available from the lenders for mortgage refinance proposals.
While applying to refinance, the lender may ask for similar information that a borrower may have given the first lender of the previous mortgage loan. The new lender will verify one's credit score and income, net worth, and debts to ascertain whether one meets the criteria for refinancing and paying back the loan.
The lender may ask for documents including pay slips or Form 16, 3 years of income tax returns and the latest bank statements.
Additionally, in case a borrower is married and has their spouse as a joint holder on the mortgage, the lender will also ask for the spouse's documents. For self-employed people, there may be some additional details that the lender may ask for.
2. Fixing or floating the rate of interest
After the refinance approval, one may either lock in the home refinance rate as fixed or choose to go for a floating interest rate, which means not locking it before proceeding with the loan. This would entail a borrower obtaining a lower rate of interest but will also put them at risk of getting a higher mortgage rate.
3. Underwriting and appraisal
Upon receipt of the refinance home loan application, the lender will start the underwriting process. At this time, the lender verifies all the borrower's financial information and ensures that the submitted documents are prima facia correct. The lender will do basic due diligence on the details of the property, like when was the home purchased and an appraisal to determine the home’s value. Once the lender initiates the appraisal, the appraiser visits the property and prepares a fair estimate of the property value.
4. Closing the existing loan
Once a person is through with the refinance home loan appraisal and underwriting process, they may proceed to initiate the closure of their existing loan. On initiating this process, their lender may send them a closing disclosure document which will have the final calculations for their existing loan closure.
The closing procedure for a mortgage refinance is normally quicker than that of another home purchase mortgage. The closing process involves people applying for the loan, the title and a representative from the lender or title company.
Conclusion
When the rates of interest outlook are in the borrower's favour, they can opt for refinancing to adjust their loan tenure or get a reduced mortgage to refinance interest rates on their mortgage which can help them to save money in the long term. Alternatively, they can go for cash on their home equity which will leave more money in their hand and the same could be used for different purposes.
This is why TATA Capital's home loan are so attractive to many homeowners. Not only do they offer affordable rates of interest, but their home loan offerings are also flexible and can be tailor-made to a borrower's requirements. Moreover, it involves instant approvals, minimum documentation and quick processing.
21 February 2023
7 mins read
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