Four good reasons to refinance your home loan

Despite these advantages consider your options carefully and make a decision based on your abilities and your financial goals, says Abhishek Agarwal. 

Ashwini Dutta has a 15-year home loan of Rs 40 lakh that he had availed at an interest rate of 11.25 per cent. After having made payments for three years, he is considering refinancing his loan for the remaining tenure at an interest rate of 10.50 per cent offer.

Will this be a wise decision?

Let's check out.

Refinancing one's home loan essentially means that a new loan is being taken to pay out your existing mortgage. Here are four good reasons why refinancing may be a good idea.

1. The interest rate factor

This is the main factor to be considered while refinancing one's home loan. If you are getting a difference of 0.75 per cent to 1 per cent between your existing rate and the rate of refinancing, you will end up saving money in the long run.

2. Switch from floating rate to fixed rate of interest

If you are on a floating rate of interest currently, and are being offered the chance of refinancing at a lower rate you may want to lock yourself in the low fixed rate.

This will protect you from interest rate fluctuations, due to the impact of macroeconomic factors.

3. It shortens your loan tenure

The tenure of your loan is inversely proportional to the EMI payments you are making. This means higher the tenure the lesser will be your EMI and vice versa.

If you have had a substantial jump in your salary because of a job switch, you can choose to refinance your mortgage for a shorter tenure and choose to increase your EMI.

However, bear in mind that this should only be done if your EMI outflow is less than 50 per cent of your monthly income.

4. Deploy money elsewhere

If you are planning to make another investment or starting a business, cashing out on some of your home equity may be a wise financial move. If you are the kind of person who can manage your debts responsibly, refinancing your home loan can really pay off well.

Refinancing your mortgage will save you money, but one should not forget that refinancing comes at a cost.

There are two parts to the cost of refinance.

First there is the prepayment penalty which may be 1 per cent for a public sector bank and up to 3 per cent for private sector banks.

The loan processing charge of the new bank is the second part of the cost that should also be considered, as a high processing fee, may make the new loan quite expensive.

Instead of making a rash decision about a refinance, consider your options carefully and make a decision based on your abilities and your financial goals.

Illustration: Uttam Ghosh/Rediff.com

The author is Co-founder and Director Credit Vidya.