Should you Refinance your Housing Loan? 10 Things to Consider First!
Are you tired of paying high interest on your home loan? Is your lender overburdening you with charges and fees for everything and giving you unsatisfactory service? Perhaps it is time for you to seek a house refinance.
A home loan refinance is when a borrower like you shifts to a new lender to not only pay lower refinance interest rates, but also to get other benefits. These benefits may include the provision of a long-tenor top up loan at low interest, better customer service and a more transparent fee structure. However, before you go in for a housing loan refinance, it is important to pay attention to various financial factors, so that your move can be a smooth one with few repercussions.
10 Things to Consider Before Refinancing House Loan
1. Check the Ratio of Borrowings to Income: This is the ratio of the amount of debt borrowed to the income per month. An ideal debt to income ratio should be 3:7. This means that for every 3 debts you acquire, you should have 7 forms of income to pay for. This is the safest ratio you should aim for. Hence, before refinancing your home loan, analyse this ratio. See if the interest rates with your current lender stacks up the debt unfavourably, and if you are spending more of your income to repay your home loan. If this is the case, it is time for a home loan balance transfer.
2. Calculate the Various Costs Involved in Refinancing: Refinancing is a move that can come with numerous costs attached. These can be processing charges, application charges, legal charges and even prepayment penalties. Investigate and find out how exactly how much you need to pay so you are not taken by surprise later. It is important for you to make sure that these charges aren't higher than the gains (or money saved) of doing a balance transfer.
3. Interest Rates and Tenor: Interest rates are the primary influencer of a home loan balance transfer. They directly influence the EMI you make towards the loan over the tenor. Hence, before transferring your home loan, evaluate your new interest and your new tenor. See if you want to shorten the tenor and pay higher EMI or extend the tenor to pay lower EMI but with more interest added to the overall amount. Both options are feasible depending on your requirements so make this decision carefully.
4. Taxes on Income: Your income tax deduction can be low or high based on the monthly interest payments on your home loan. Paying lower interest during your home loan balance transfer may reduce your tax savings. The best way to understand the tax implication of refinancing is to check with your CA or tax consultant and be aware of any changes before you opt for a transfer.
5. Credit Score: A credit score can be defined as score that provides valid judgement on your creditworthiness. A low score would make it difficult for you to receive a loan of your choice. A higher score would make approval of your loans easier. It is important for you to review your credit score before the transfer. Either make sure you have a good credit score or make the right moves to improve your score. A bad score can lead to rejection of your transfer application or increase your interest.
6. Customer Service: Before shifting to a new lender, do a thorough analysis of the customer service of your chosen lender. Customer service is the way lenders treat their customers and address any issues that you may have. The customer service of a lender can be understood from online reviews, talking to existing customers and even via word of mouth. Select a lender you want to refinance your home with based on good reviews.
7. Home Equity or Value: Before performing a transfer it is important for you to know about your home's value in monetary terms. A fall in the value could lead you to make higher EMI payments over time to cover up for the fall in equity. Refinancing your home loan is relatively impossible when your home has low equity. Borrowers with a high equity are more likely to succeed at a balance transfer.
8. Points of Difference in Interest Rates: Points can be described as the difference in rapidly changing interest rates. These points can be high or low depending on the interest rate system of the lender. Points are important as they show you by how much an interest rate has increased or decreased over time. They also let you estimate and analyse future changes in interest rates. Stick to lenders with low points as these lenders are risk-free as compared to lenders who have high points. The interest rates with high points can soar particularly high at times, negating the benefits of a refinance.
9. Break-Even Point: It is always important to break even or gain more benefits over the transfer. Before going ahead with the transfer, it is important for you to consider all the costs and savings resulting from the move. You should only go ahead with the move if your savings break even with the costs, or are higher than the costs.
10. Floating and Fixed Interest Rates: The market has lenders offering both floating and fixed interest rates. Floating rates are heavily under the influence of market forces. These can rise considerably high or fall at various points in time. Whereas fixed interest rates have little or no fluctuations. They are based on either base rate or MCLR systems. Study the market and choose a lender based on your understanding of what will benefit you more, given the economic situation. Generally, borrowers like a fixed rate on their home loans for a few years, after which they shift to a floating rate.
Once you have analysed these factors, and can monetarily point to the gains from a home refinance, don't wait any longer. Apply for a home finance from Bajaj Finserv, which not only offers you nominal interest rates, but also a convenient top up loan provision.