Refinancing a home loan is a highly beneficial step to boost your financial health. In addition, you can completely pay off the initial debt, saving money on the repayment interest. Refinancing is worthwhile only when the second loan’s interest is lower than the initial one.
5 Reasons Why Refinancing Your Home Loan is a Good Choice
1. Low-Interest Rate on Repayment
The primary reason why most people choose to refinance their home loans is to reduce the interest rate. For example, you have received a ₹10 lakhs home loan from bank A at the rate of 8 %. However, later on, you may find a second loan offer at a lower rate of 7%. You can choose to apply for the second loan and repay the initial one with it. Before refinancing, your total repayment amount would be ₹10.8 lakhs. However, after refinancing, it will lower to ₹10.7 lakhs. In this way, you can considerably readjust the interest rate to increase your savings.
2. Top-up Funding
In general, home loans do not offer the facility of top-ups. However, through refinancing, you can get top-up funding. For example, a lender has received a grant of ₹30 lakhs for a property worth ₹50 lakhs. However, after a few years, the property’s real estate value goes up, and it is now worth ₹90 lakhs. In such a situation, you can apply for a much bigger loan. In addition, you can apply for a second loan to repay the outstanding balance and receive an extra financial boost.
3. To Adjust Loan Tenure
One of the biggest benefits of refinancing a home loan is readjusting the loan tenure. Unfortunately, increasing the tenure of an active loan is difficult. However, you can opt for loan foreclosure by refinancing through a second loan. The second loan allows you to choose a loan tenure that is suitable for you in that situation.
4. Poor Service
If your lender does not offer satisfactory service, it is time to refinance your loan. All lenders are obligated to provide on-time loan statements, prompt customer service and update interest rates. However, if your lender does not fulfil these obligations, you can choose to repay the home loan interest through refinancing.
5. Changes in Financial Status
Changes in financial status are common, and they may affect your ability to repay a loan. For example, you can opt for a second loan with a short tenure to repay the first loan quickly. Similarly, you can opt for refinancing the first loan with a long-tenure loan during financial difficulties.
Process of Refinancing
Refinancing a loan is similar to applying for the initial loan. You must apply for the second loan and submit the necessary documents for approval. After the second loan is sanctioned, you can use the amount to repay the initial loan.
Documents Necessary for Refinancing
Below is the list of documents that lenders must provide to refinance their home loans.
- No Objection Certificate (NOC)
- Loan statement
- Documents of the concerned property
- Letter of Consent
- Post-dated cheques
- Foreclosure letter
- KYC documents
- Identity and address proof
- Financial documents like income proof (salary slips) and Income Tax Returns of 3 years.
- Documents of the first loan.
Things to Consider for Refinancing
- Refinance the first loan early on for greater benefits.
- Keep documentation ready since your refinancing request will be considered a new loan.
- Refinancing may attract a new processing and valuation fee.
- Refinance if your credit score has improved.
- For hassle-free approval on refinancing, you need to maintain regular repayments on the existing loan.
Benefits of Refinancing a Home Loan in a Nutshell
- Better loans at lower interest rates and flexible tenure.
- Additional funds.
- Loan foreclosure.
Refinancing a housing loan can be a great step if taken correctly. Moreover, refinancing can provide flexibility that an active loan may lack. Therefore, do not hesitate to refinance your housing loan if you can.