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Refinancing your Home Loan

Wednesday, February 19, 2014 by Rajiv Raj

hl128n28v1It is the time in markets where there is anticipation of good and cheerful is reigning supreme. It is also the time when many expect interest rates to come down. In such situation refinancing your existing mortgage, also known as balance transfer of home loan, can be the option that would figure top in your priority list. And before you wonder on what should be your first move, here are certain reasons why you should go for it: 

Saving of time and money is good enough reason to go for refinancing your home loan. Let us understand this with an example. Let's say your home loan outstanding as of today is Rs 50 lakh and the current interest rate is 11.5%. Then in that case you are paying an equated monthly installment of Rs 53,322 and you are still 20 years away from debt free status. But if you refinance your home loan at 10.5%, you will be paying an EMI of Rs 49,919 - saving of Rs 3404 per month. Alternatively, you can also keep your EMI constant. If you choose to pay an EMI of Rs 53862, you will be debt free in just 16 years, a saving of four years. Put simply, you benefit in the process. 

This saving is quite meaningful as saving some money now amounts to creating wealth in the long-term. If you have five years to become loan-free, you should think of opting for refinancing. After all, it is your hard earned money and longer the time you repay your home loan more money in interest payments. Second and the most important rule is the prevailing rate of interest on your home loan. If the prevailing rate of interest payable on your home loan is 100 basis points more than the interest rate on offer in the market, you should consider refinancing your home loan. If you have a home loan outstanding in your name, and any of these two conditions is met, it is the time to act. 

So, what is stopping you from doing this? Is it ignorance or misplaced fear? Many a time borrowers are not aware that the banking regulator RBI takes decision that serves them best. Take for instance, the abolishment of prepayment penalty on the floating rate home loans. This means that you are free to move to any other bank or home loan lender. However your new bank may charge you some processing fee to cover the cost of due diligence it does while giving you the home loan. To that extent you have incur one- time cost, which is usually in the range of 0.5% of the loan outstanding. Many banks put a cap on such charges say Rs 25000. Some banks to waive it to lure good customers especially if the customer has a credit score or CIBIL score of more than 750. If you have a very good CIBIL score, anywhere between 750 and 900, you stand to save on these costs.

If you do some homework about the prevailing interest rates offered by banks, you will surely find some good deals. As interest rates are on the way down, you stand to benefit. If you refinance your home loan now, you are highly likely to save more. So, focus your energies on these to make the most of the present situation.

MadanRajiv Raj

Rajiv is a credit expert with 10 years of experience in personal finance and consumer banking industry and another 7 years in credit bureau sector. Rajiv was instrumental in setting up India’s first credit bureau, Credit Information Bureau (India) Limited (CIBIL). He has also worked with Citibank, Canara Bank, HDFC Bank, IDBI Bank and Experian in various capacities.

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