Busting Common Myths of Home Refinancing in India

Myths exist everywhere and in different aspects of finances. A home loan is no exception. And, one of the most misconceptions or myths about home loan is related to home loan refinancing or mortgage refinancing. Many home loan borrowers believe that opting for refinance is not beneficial. 

Another popular false notion that people harbour is that they can opt for home loan refinancing only after they have repaid a substantial amount of home loan. If you have had such misconceptions too, then this blog is just for you as we bust a few common myths. 

 

What is home loan refinancing?

Home loan refinancing simply means transferring your home loan from the existing lender to another one who offers the loan at a lower interest rate. Opting for a home loan refinancing loan, or home loan balance transfer is a smart financial move as it helps you reduce the financial burden associated with high interest payment. 

A lower interest will automatically mean the EMI is less and more affordable to you. Also, with lower interest, your overall loan cost reduces significantly and you can repay the loan faster. 

 

Common myths about home loan refinancing

Let us know the myths related to home loan refinancing and the facts behind them with an example. 

Mr Mayank Gill has taken a home loan with a certain lender and is struggling to keep up with the EMI payments due to the high-interest rate. However, he is sceptical of opting for home loan refinancing because he believes that the false information available on the internet about home loan refinancing is true. 

Myth 1 

Home loan refinancing is costly

Fact

When Mr. Gill prepays the home loan as part of the home refinancing process, he may have to incur a penalty of about 2% of the outstanding principal amount. Additionally, when he initiates the home loan transfer process, the new lender may levy a processing fees of about 1% of the principal amount. 

In both cases, the fees he may incur are only a fraction of the total amount he will save by opting for mortgage refinancing. It is a better option for him than sticking with the same lender and paying high interest, which could cause him immense financial stress. 

So,  Mr. Gill need not have to be afraid or worried about the refinancing cost. Most lenders will allow him to add these fees to the balance loan amount. This means he need not have to pay these fees upfront. Instead, he can pay these charges over time along with the EMI. 

Myth 2 

Switching the home loan from a fixed rate to a floating rate is not allowed during home loan refinancing

Fact

Let’s say Mr Gill took a home loan on a fixed-interest rate basis, and he continued to pay the same interest rate even after 10 years when the actual market rate was pretty low. Once he realized his initial mistake, he chose to refinance his home loan with a different lender and also wished to switch to floating-rate interest. 

All lenders allow borrowers to switch from fixed-rate to floating-rate interest during home loan balance transfers. Once Mr. Gills opts for home loan refinancing, he can save a lot of money on interest payments. 

Myth 3

Refinance the home loan when the interest rate drops

Fact

Yes, Mr Gill may want to refinance his home loan to save on the high-interest charges he is paying to the existing lender. But a drop in interest rates should not be the only factor influencing his mortgage refinancing decision. 

There are other costs involved with the home loan balance transfer, like processing fees and prepaying charges, which may dilute the savings. So, before it would be wise for Mr. Gill to do a cost-benefit analysis to determine the savings and if the transfer cost is high, it would be better for him to stick with his existing lender. 

Myth 4

It is better to opt for refinancing home loan with the existing lender 

Fact

Mr. Gill can choose to refinance his home loan with any lender of his choice; he has no legal or moral obligation to stick with the same lender. When he chooses to switch his home loan to a different lender, they may do a lot of work for him, making the whole process hassle-free. 

However, it would be prudent for Mr Gill to get quotes from different lenders and compare the interest rates offered before making the final decision. 

 

Conclusion

Home loan refinancing is a wonderful way to reduce your home loan repayment burden. The lower interest rate will automatically translate to lower EMI, making repayment easier and affordable for you and you can become debt free sooner. 

 

FAQs

Q1. How many times can you opt for home loan refinancing?

Ans 1 Legally, there is no limit on the number of times you can opt for a home loan balance transfer. But you must do your due diligence to assess the cost-to-save aspect before choosing to refinance your home loan. 

Q2. When can you refinance your home loan?

Ans You can initiate the home loan refinancing process anytime you want. But, it is better to do it during the initial few years of the loan tenure when a large portion of the EMI goes towards repaying the interest. This way, you can pay off the interest faster due to lower interest and close the home loan account sooner. 

Q3. Why should you choose home loan refinancing?

Ans Home loan refinancing allows you to repay the loan at a lower interest rate and obtain more favourable repayment terms and conditions, which can help you save a lot of money on interest payments.