Home Loan

Complete Guide on How to Refinance Your Home Loan in 2022


What is home loan refinancing?

When a person decides to refinance their loan, they choose to replace their existing loan with another loan that is frequently offered by a different provider. There can be many reasons that a person chooses to refinance their housing loan, but the main reason people do it is that they find better terms elsewhere.

The refinancing process entails paying off the existing loan’s monthly due and shifting to the new payment structure and schedule of your new lender. This often results in the person having to pay loans at lower rates or pay them off faster as compared to their previous loan. 

How does home loan refinancing work?

Let’s say you had taken a housing loan of Rs. 50 lakhs at an 8% interest rate to be paid off in 20 years. Accordingly, you will get an EMI schedule that will give you the details about how much you need to pay every month as the principal amount and the interest amount. 

If, after a few years of paying your loan EMIs, you notice that there is another bank or lender who is offering a lower rate of interest on housing loans at 6.5%, then you can choose to shift to this new lender.

Assume you paid off your old loan in 4 years and paid a total of 10 lakhs. So the remaining amount you have to pay is Rs. 40 lakh. Now, to refinance your loan, you will take a loan of Rs 40 lakh from the new lender, use that money to pay off the old loan, and then start paying the new EMI schedule. 

In this way, you will be able to save a lot of money by paying less interest on the amount you borrowed, and you will have the ability to pay off your loan faster. 

When should you refinance your home loan?

Listed below are some of the main reasons why you should consider refinancing your loan:

  • When other banks or lenders are offering a lower rate of interest – Refinancing your housing loan is a smart choice when you see that other loan providers in the market are offering a better rate of interest than you are currently paying for. 
  • When you can’t change your rate of interest from fixed to floating rates or vice versa – When you take a loan from a lender to pay off the amount of your house, the lender will often provide you with the option to pay interest at a fixed rate or a floating rate.

    A fixed rate of interest is one in which a certain percentage is determined in advance and is the amount of interest you must pay throughout the repayment period. A floating interest rate is volatile and will keep changing as per market conditions. So some months you might have to pay more interest, and in other months you will be paying less. 

    Depending on the economic situation of the world and the country you reside in, a floating interest rate can be beneficial or harmful to your repayment terms. But if you are in a situation where you see that the floating interest rate in the market is less than the fixed interest rate of your home loan, then you decide to refinance it from a different lender.

    Similarly, if you notice that the market conditions have not been good and that you are ending up paying quite a lot because of high floating interest rates, then you can choose to refinance your loan with a provider who is offering a lower fixed rate of interest. 
  • Increase in your credit score or income – Another situation when you should look to refinance the loan for your home is when your income has increased consistently and you have made a good credit score for yourself. In such cases, you can negotiate with your existing loan provider to lower the rate of interest or shorten the duration of the repayment term so that the total amount you have to pay in the end is much less. If your existing lender does not agree to renegotiate, you can approach other lenders to do the same. 
  • When you need an additional loan – Another instance when people look to refinance their loan is when they need an additional loan. This is ideal to do when you have been paying off your existing loan comfortably for many years and will continue to do so for the rest of the repayment period as well. But now you also need a loan for a different purpose. Then you can take out a new loan by pledging your house as collateral. This may also help you obtain a larger loan because the value of your home will have increased over time.
  • When you are not satisfied with your lender’s service – Another reason that you may decide to refinance your loan somewhere else is that your existing lender is not providing you with good service. 

Things to check before refinancing your home loan

Before you go ahead and find a lender with whom you will refinance your loan, here are some things you should keep in mind:

  1. Compare your existing loan and the new loan – Before you switch to a new lender, always use an EMI calculator and figure out the specific details of how much you will have to pay as compared to your existing loan.
  2. Loan closing fee – When you decide to close a loan with your existing lender, they will often have a processing fee that you have to pay to close and refinance your loan. This can be 1%, more, or less, depending on your provider. You should weigh the impact of this closing fee on the overall amount you will pay in the end and decide whether you should refinance your home loan or not.