Most homebuyers often see refinancing as a practical solution to lower their loan burden. There are several reasons why a borrower may prefer refinancing a home loan. This could include a low interest rate from another lender, or a reduced loan tenure. Home loan refinance refers to transferring one’s outstanding loan balance to a new lender.
What is refinance?
Refinancing refers to the process of replacing an existing debt obligation with a new one under different terms.
In real estate, refinancing refers to the process by which home loan borrowers avail a new loan from another lender to pay off an existing loan.
How is refinancing done?
Refinancing is done by approaching a new lender to settle the dues with the existing lender. Typically, new lenders are preferred due to better terms and conditions. One is required to complete the documentation. In the next step, the new lender will pay off the loan to the existing lender and takeover the outstanding loan amount. The borrower will have to pay the EMIs to the new lender.
Types of refinance loans
Rate and term refinance
This type of refinance loan is used to refinance an existing loan to get a low interest rate or change the prevalent terms of the loan.
Cash-out refinance
A cash-out refinance loan is beneficial when a borrower needs cash. This type of loan replaces an existing loan with a new loan, where the value is higher than what the borrower owes. The difference between the two loan amounts is given to the borrower as cash.
See also: What is home loan top-up?
Reasons for refinancing
- Lower interest rates: One of the major reasons why borrowers opt for refinancing is the availability of lower interest rates from the new lender. This reduces their total interest expenses and monthly EMIs.
- Type of interest rates: A borrower may be paying a high interest than required if he has a fixed or floating interest rate. Refinancing enables them to switch to a lower, fixed, or floating interest rate.
- Availability of top-up loans: Some lenders may offer incremental loans or top-ups when borrowers apply for refinancing. This is beneficial as a homebuyer may obtain additional funds from the new lender on his increased property value in case of property value appreciation, home renovation or other investments.
- Shortened loan tenure: Refinancing also helps to shorten one’s loan tenure and reduce the EMI burden when income increases. Similarly, in case of any exigency or when the borrower’s income decreases, refinancing may help increase the loan tenure and lower EMIs.
Does refinancing impact credit score?
Refinancing may impact a borrower’s credit score in the beginning. However, in the long run, one can improve his/her credit score by ensuring timely payments and managing the debt.
When switching to a new lender, besides considering the interest rate on the new loan, one should evaluate factors, such as loan tenure and hidden charges applicable to refinancing.
FAQs
What are the purposes of refinancing?
Most borrowers consider refinancing to obtain a low interest rate, low loan tenure or access to incremental loans or top-ups.
Is it risky to refinance?
When planning to refinance a home loan, a borrower must consider his financial situation and go for refinancing if he can reduce his loan burden.
What are the charges associated with refinancing a home loan?
Some charges one may have to consider when going for refinancing include stamp duty, prepayment charges of the new lender, foreclosure charges of the existing lender, processing fees, and insurance.
Does credit score impact the refinancing of a loan?
A good credit score is essential to opt for refinancing a loan.
Can a bank decline a refinance?
Banks may reject an application for refinancing if they consider that the borrower cannot repay the loan amount or if the credit score is extremely low.
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Harini is a content management professional with over 12 years of experience. She has contributed articles for various domains, including real estate, finance, health and travel insurance and e-governance. She has in-depth experience in writing well-researched articles on property trends, infrastructure, taxation, real estate projects and related topics. A Bachelor of Science with Honours in Physics, Harini prefers reading motivational books and keeping abreast of the latest developments in the real estate sector.
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