Home loan: Should you refinance it?

While the uncertainties that the pandemic brought for the economy did affect the projected growth in a number of sectors, the housing sector has been a mixed bag. For the consumers, the last 15 months or so have offered unmatchable interest rates that one has witnessed for home loans in India.

The all-time low-interest rates plus the emerging dynamics of work from anywhere created a strong uptick in the demand for affordable housing units in the tier-2 and 3 cities. For first-time homebuyers, the low-interest rates provided a great opportunity to make a move towards buying a house of their own, on the other hand, many who had financed a home during the pre-pandemic time, explored the option of balance transfer and refinancing their home loan as well.

However, there were also many people who had already availed a balance transfer once before, as they have been in the middle years of the tenure of their loan, these people faced the most uncertain question — is it worth refinancing the loan again?

How many times can you refinance?

Typically, refinancing the home loan means replacing the existing loan with a new one that offers new rates and policies. It can help you choose different repayment periods and can help to pay off the loan much faster. You have the option to refinance with the same lender or choose a new lender.

There are no refinance rules or legal limits to the number of times you can refinance your home loan. But there can be a limit to how often you do it and the duration between them. Generally, a lender keeps a waiting period of seven months before you can refinance again.

This period is long enough to make at least six monthly payments. Even though refinancing is easy, it’s not always the best idea. Sometimes, refinancing multiple times can be costly and have major financial consequences if not planned carefully. Therefore, look at the bigger picture before you take a step.

Cost Considerations

Nothing comes free, not even refinancing. You are likely to pay a processing fee which can be 0.5-1% of the principal amount. A general rule of thumb is to calculate the costs you will be bearing against the potential savings.
However, mostly the fees and charges are only a fraction of the total cost you will be saving through a refinance. Sticking to a high interest rate with a fear of these charges can be toxic for your finances. Do not panic when you come across these charges as there are various ways to manage them.

When it comes to savings in the long term, there are lots of reasons to refinance. Whether it’s for the first or the third time, there are certainly both good and bad reasons to go with it.

Below are some reasons why you might want another refinance:

1. Interest rates have fallen

If your current interest rate is more than today’s industry rate, then refinancing might save you money. For example, a 30-year home loan of Rs 1 crore with a 7.8% interest rate would cost you around Rs 60 lacs in interest rate over the life of the loan. If the interest rate drops to 7.2%, you would be saving around Rs 15 lacs over 30 years. Even a small difference in interest rate can help you save your money and provide you with much-needed financial relief.

2. Change of monthly payments

Monthly payments are based on your income, debts, and other factors. Over the years, there is a possibility that you have got promoted or paid off your debts. If you are comfortable taking larger monthly payments, then refinancing can be a solution for you. You can refinance your long-term, 30-year home loan to a short-term, 15-year loan, depending on your budget.

However, the financial situation cannot be the same for everyone, for those looking to open more cash flow can also reduce their monthly payments. With this option, you might end up paying more in interest due to the long-term payoff.

3. Converting to a fixed-rate or vice versa

If currently you are in a floating rate home loan and believe that current rates are ideal, you can refinance your home loan into a fixed rate. This will give you the comfort of knowing that your monthly payments are going to be the same, giving you a chance to build a balanced financial budget.

There are always two scenarios for home loan borrowers, the other is converting fixed home loans to floating-rate loans. This is for those who feel stuck with a fixed home loan at a high rate and need some flexibility.

(The writer is co-founder and CEO, BASIC Home Loan. Views expressed are personal)