Refinancing a home loan typically means switching from one lender to another to take advantage of lower interest rates on offer. But how low the interest rate is matters too. Look to seal a home loan refinancing deal at a rate lower than the current one by at least 0.50-0.80% to save huge. Plus, are there any charges for home loan refinance? Besides costs, you also need to keep an eye on the formalities for a seamless transition to the new lender. Let’s check all these in greater detail below.
Home Loan Refinance Savings, Applicable Charges & Other Details
As told above, one should look for a lower rate of 0.50-0.80% while refinancing a home loan. Given the prevailing low-interest rate regime, the savings can exceed INR 3-4 lakh. Besides, the deal entails processing fee, legal & technical charges.
Let’s Check the Home Loan Refinance Savings Through an Example
Suppose you’ve been paying the home loan of INR 60 lakh for the last three years at an interest rate of 8% per annum. Given the prevailing interest rate regime, you could get a deal of 7.40% on home loan refinance. Should you book a deal at that rate, how much could you save? Let’s check!
|Home Loan Refinance Details||Amount (In INR)|
|EMI Payable at 8%||50,186|
|Total Interest Payable at 8%||60,44,737|
|Interest Paid Till Three Years||13,93,799|
|Outstanding Loan Balance After Three Years||55,87,088|
|EMI Payable at 7.40%||48,209|
|Interest Payable at 7.40%||42,47,490|
|Interest Paid at 8% + Interest Payable at 7.40%||56,41,008|
Home Loan Refinance Charges
While refinancing a home loan, the lender carries out legal & technical verification as well as credit appraisal, much like what had happened when you had taken a home loan first up. With these comes processing fees, legal & technical charges, etc. These charges would most likely not exceed 1% of the outstanding loan balance. Your overall savings could reduce by some owing to these charges. Considering the above example where the outstanding loan balance comes as INR 55,87,088 after three years, these charges would then amount to INR 55,870.88. Deducting these charges, the overall savings would amount to INR 3,47,858.12.
Importantly, a credit score would be much more vital in home loan refinance. Cases may get rejected if your credit score remains low while refinancing. A credit score of more than 750 is considered excellent.
Shall You Look for a Shorter Tenure While Refinancing a Home Loan?
A shorter tenure helps curb the outflow of interest. However, the Equated Monthly Installment (EMI) will rise in that case. But the increased income may allow you to do so and save more on a loan refinance deal. So, instead of getting a reduced EMI amount, look to pay the same amount. This will reduce the length of the loan considerably and help you save more.
Formalities Required for Home Loan Refinance
Home loan refinance requires you to get the no-objection certificate from your current to the new lender. The certificate would state that the existing lender has no objection to the loan getting refinanced by the new lender. Besides, you need to submit the loan statement showing the outstanding loan balance, interest payments made, and usual income and KYC proofs. The new lender will verify all these documents before approving your application.
But Can the Existing Lender Also Refinance Your Home Loan?
Yes, it can! The basic idea of refinancing is to restructure the loan to suit your needs. So, you can contact your existing lender to restructure your loan in terms of interest rates and tenure. In case it does not honour your request for a revised loan structure, switch to another lender that offers you the same.