Home loan refinancing is obtaining a new loan to pay off a current mortgage.
Refinancing replaces your current mortgage with a new one, usually at a lower interest rate. The most common reason to refinance is that your interest rate has dropped since you initially took out the mortgage.
Another reason could be that an individual might be interested in selling the existing home, moving to a different one, renovating the existing property, etc.
Some home loan refinancing options include:
- Refinancing your current mortgage by transferring your existing home loan into a new mortgage with a new lender
- Refinancing your current mortgage by moving your existing home loan into a new mortgage with the existing lender.
Should You Refinance Your Home Mortgage?
It is sometimes advantageous to refinance an existing home mortgage when interest rates decline. In mortgage refinancing, a new mortgage is obtained to pay off and replace an existing mortgage. Most often, it is undertaken to lower the monthly payment on the home by taking out a loan with a lower interest rate.
The example here illustrates determining whether refinancing your mortgage is a wise choice.
Example: Suppose the original mortgage for Rs 1.3 Crores was obtained seven years ago at an 8 percent interest rate for 30 years. The monthly payment is Rs 95,400. After seven years, the principal owed has declined to Rs 1.2 Crores. If the interest rate for new mortgages has fallen to 6.5 percent, the owner could take out a new mortgage at the lower rate for a monthly payment of 84,000.
Borrowing Rs 1.2 Crores for 23 years at 6.5 percent saves approximately Rs 11,400 per month (Rs 95,400 – Rs 84,000). However, refinancing may have up-front costs, including a possible prepayment penalty on the old mortgage and closing costs for the new mortgage. The question is, will these costs exceed the monthly savings gained with a lower payment?
It may also be possible to borrow more than the current balance on the existing loan, thereby utilizing some of the equity built up in the home. However, borrowers refinancing for more than the amount owed should understand that rebuilding the equity to its previous level may take many years.
How the Benefits of Home Loan Refinance Outweigh the Risks
When you refinance your mortgage, you can lower your interest rates and may save some money. However, before you make the decision, you should consider the pros and cons of refinancing your home loan.
Pros: Refinancing can help you save money on interest rates and lower your monthly payments.
Cons: You might have a lower credit score if you have a lot of debt. Your credit score will also depend on how much equity you have in your home, so refinancing might not be an option for everyone.
What are the Important Things to Consider when Looking for a New Mortgage Provider?
When you are looking for a new mortgage provider, it is essential to consider the following:-
- How long have they been in business?
- What kind of experience do they have?
- What kind of services do they offer?
- What are their rates like?
- Does a governing body regulate them?
Conclusion: Everything You Need to Know about Home Loan Refinancing Options
The home loan refinancing process allows homeowners to borrow more money to repay their existing home loans than they originally borrowed. The method may vary based on your current lender and the loan you are currently taking out.
The conclusion is that a new mortgage can help you save money. There are many different types of mortgages, and your financial situation will determine which one is best for you.