Say, you take a loan to finance a new house. After a few years, you notice that home loan interest rates have reduced. Now, you wish you had taken the loan at this rate instead. Well, the good news is that if you find yourself in this situation, you can take advantage of reduced interest rates by refinancing your loan.
When you refinance your loan, you get another loan at a lower interest rate and use it to pay your existing loan. Then, you pay smaller EMIs for the new loan, thanks to the lower interest rate. By doing so, you reduce your net interest payment in the long term.
Want to know more about how home loan refinancing at a lower ratecan benefit you? Keep reading!
How much money can you save?
The answer: a considerable amount! Here is an example.
Suppose you took a loan of Rs. 50 lakhs for 20 years, at a rate of 10%. After 3 years, you notice that the interest rates have dropped to 9%. At this stage, here are your loan terms:
|EMI amount||Rs. 48,251|
|Amount you have paid in 3 years (36 months)||Rs. 17,37,036|
|Amount remaining||Rs. 32,62,964|
|Tenure remaining||17 years|
Now, you have two options:
- Continue with your existing loan
- Refinance your loan at a reduced rate of 9%.
Which one should you choose? Let us calculate.
|New Principal amount (P)||Rs. 32,62,964|
|Interest payable at 10% p.a.||Rs. 35,34,669|
|Interest payable at 9% p.a.||Rs. 31,19,263|
|Interest Savings (Difference)||Rs. 4,15,406|
You might be skeptical about paying a hefty processing fee and foreclosure charges. Don’t worry because they are low as compared to the interest amount you would pay at the higher rate. Let us assume their values to be the general trends in the market, then deduct them from your interest savings.
|Principal Amount (P)||Rs. 32,62,964|
|Foreclosure Charges (2% of P)||Rs. 65,259|
|Processing Fee (0.5% of P)||Rs. 16,315|
|Total overhead||Rs. 81,574|
|Net savings||Rs. 3,33,832|
So, as you can see, you can save around Rs. 3.33 lakhs with home loan refinancing.
Additional Read: 10 Benefits of Taking a Home Loan
When should you refinance your loan?
Refinancing your home loan is beneficial in the early stages of your loan repayment. The reason is that your interest savings will be more for a high principal amount and a longer remaining tenure. If you have already paid most of your loan and have only a few years remaining, stick to your existing loan.
Additionally, ensure that you have a high credit score before applying. If your credit score is low, lenders may charge you higher interest rates which will defeat the purpose of refinancing your loan.
Loan refinancing checklist
- Read your lender’s terms and conditions thoroughly.
- Note the processing fees, foreclosure charges, and additional fees and take them into account while evaluating your savings.
- Keep your documents ready. These include your ID proof, address proof, income proof, and any documents related to your existing loan.
Additional Read: Top 5 Emergency Options to Use For Repayment of Housing Loan EMIs
Over to you!
Looking for a reputable lender to refinance your housing loan? Tata Capital is here to help! We offer you loans at attractive interest rates, with flexible repayment options. So visit our website, check your home loan eligibility, and apply online.