Home Loan Refinancing – Pros and Cons

For homeowners, refinancing their home loan is a very good option to lower their monthly payments and save money. Home loan refinancing allows them to transfer or switch their home loan balance to a new lending institution offering a lower rate of interest or a convenient repayment term. However, loan refinancing has a few demerits as well.

In this article, one can explore the pros and cons of home loan refinancing and then decide whether it would be the right option for them or not.

Advantages of home loan refinancing

There are several reasons for a homebuyer to opt for a mortgage refinance

• Lock in a lower interest rate

  One of the primary advantages of home loan refinancing is that it allows a homeowner to lock in a lower interest rate on their home loan. Usually, a home loan comes with a tenure of 10 to 15 years, and a lot of things can change in between. For example, the Reserve Bank of India (RBI) can lower its repo rate, resulting in lenders dropping their home loan interest rates. In such a case, one can opt to refinance the mortgage loan and save a good chunk of money. The lower interest rate could also result in reduced monthly instalments that a homeowner will need to pay for the repayment of their home loan.

• Option to change the repayment tenure

  Another common reason for homebuyers to opt for loan refinancing is that they get to change their repayment tenure. One can refinance their mortgage to a new lender who is offering a better loan tenure. If a homebuyer wants to reduce their monthly EMI amount, they can refinance their home loan to a lender offering a longer repayment tenure. On the flip side, if one wants to repay the loan faster and save on the interest outgo, one can refinance their mortgage loan to a lender offering a shorter repayment tenure. This allows a homeowner to pay off their home loan sooner than anticipated and pay off the debt swiftly.

• Save on the insurance cost

  Some lenders make it mandatory for homebuyers to get an insurance policy for their home loan repayment. This is done to ensure that they get their loan amount back even if something unfavourable happens to the borrower. However, this could lead to a significant addition to the EMI amount that the borrower has to pay. So, after a homeowner has paid almost half of their home loan amount, they can opt for loan refinancing to save on the insurance cost.

• Unlock better terms and features

  Home loan refinancing can also help a homebuyer unlock better features and facilities. For example, one can shift to a lender offering floating home loan refinance rates and vice versa. One can also get facilities like online EMI payment, WhatsApp banking, EMI holidays, and zero pre-payment charges.

Disadvantages of home loan refinancing

Here are a few downsides of mortgage refinancing-

• Pay the loan closing charges

  Some lenders demand a loan closing charge or a pre-payment penalty if a homebuyer wishes to close their home loan account before the end of the actual tenure. In some cases, the loan closing charge offsets the financial benefits that a homeowner might be getting from a mortgage refinance.

• Negative impact on the credit score

  Closing a loan account can cause a decline in the borrower’s credit score. It also reflects in their credit reports. Additionally, when a homeowner applies for a loan refinancing, the lender conducts a hard enquiry on their credit report, which also causes a temporary drop in their credit score. Such a scenario may hurt the homeowner’s chances of securing credit in the near future.

• It can take a lot of time and effort

  Loan refinancing can be a time-consuming affair. One may be required to make several visits to the lender’s office. Additionally, one may have to go through the entire verification process once again.

Should a homeowner opt for home loan refinancing?

After knowing the pros and cons of home loan refinancing, this shouldn’t be a tricky question to answer. Before taking a final decision, one must weigh the benefits of loan refinancing against the money and efforts that one will have to spend for it. One can take the help of online mortgage refinance calculators to compare their savings and costs.

One should also consider their current financial situation while making this decision. For example, in tough circumstances, one can opt to lower their EMIs through home loan refinancing even if it means paying a higher interest amount.

Disclaimer- This article is based on the information publicly available for general use as well as reference links mentioned herein. We do not claim any responsibility regarding the genuineness of the same. The information provided herein does not, and is not intended to, constitute legal advice; instead, it is for general informational purposes only. We expressly disclaim /disown any liability, which may arise due to any decision taken by any person/s basis the article hereof. Readers should obtain separate advice with respect to any particular information provided herein.