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Refinancing Home Loan

Refinance Home Loan

Last Updated 17th Jun 2021

  • Refinancing a housing loan means availing a new loan from another lender to pay off an existing one.
  • Home loan refinance is another term for home loan balance transfer.
  • Refinancing of home loans helps in reducing the interest burden as you can switch to a lender that offers a lower rate of interest.
  • Individuals can also consider refinancing in case the existing bank is offering poor services.
  • Currently, you can avail the lowest home loan balance transfer at 6.65% to refinance your home loan.
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Home Loan Refinance

Refinancing refers to a process under which an individual avails a new home loan from a bank or financial institution to pay the existing home loan. Home loan refinance is another term for home loan balance transfer. Thus, it is also known as switching a house loan. The two most important reasons for considering the home loan refinancing are to avail cheaper home loans due to reduced rates and to avail an additional loan.

Factors to Refinance your Home Loan

The decision to refinance the home loan must be based on the following factors:

  • Interest burden: The most crucial factor while considering a home loan refinancing is an interest burden. The interest burden is dependent on the rate of interest charged on the home loan. As most home loans interest rates are floating and depend on the rate sets by RBI, customers can save high costs in time of declining interest rates. However, not all banks equally pass on the benefits of rates changes to the customer. That is where Home financing comes into the picture.
    If the interest burden on the existing loan is higher than the interest burden on another loan which is offered by another bank, then the customer should prefer switching home loans. The switching of home loans will help customers to reduce the interest burden and thereby save the additional cost.
  • Change from fixed rate to floating rate regimen and vice-versa: There are no set rules that the final interest burden on the floating rate is higher and lesser than the fixed rate. At times the interest burden due to floating rate is higher than the fixed-rate and vice-versa. In all those cases switching the home, loans help the borrower to save the cost on interest paid.
    However, the borrower must take in account the fact that the amount saved due to switching the home loan should also account for the cost for closing the existing loan and processing cost of the new home loan.
  • Increase in the loan amount: One of the main reasons to prefer home refinancing is to get the additional loan amount. For instance, Mr Raj took a loan of ₹ 50 Lakh for buying a ₹ 70 Lakh property. After paying the EMIs for five years, the loan value has ultimately come down to up to ₹ 30 Lakh. However, the property value on the other hand has appreciated by ₹ 1 Cr. Mr Raj can now consider the chance of taking an additional loan with the appreciated value.
  • Better terms and conditions: Customers can also choose to opt for the refinancing of home loans if another bank is offering better terms and conditions related to the loan. The terms and conditions may include flexible repayments, better services, permits switch from fixed to floating/adjustable interest rate, permits a reduction in loan tenure, allows a reduction in EMI

How Is Home Loan Refinance Done?

Home loan refinancing is a simple and straightforward process which involves getting the new Bank or financial institution to settle the dues with your existing bank and take over the outstanding loan amount. Once the customer has selected the bank which is offering better terms and conditions in comparison to the existing bank, he may complete the documentation and other related formalities upon which the bank will pay off the loan to the old bank and take over the outstanding loan amount. The customer would then start paying Equated monthly statements to the new bank.

FAQs

When should you refinance your mortgage?

The reason for refinances are:

  • when another lender is offering loans at a lower interest rate.
  • when you can reduce interest burden by changing the rate from fixed to floating and vice-versa.
  • when you want to get additional loan
  • when your existing lender is offering poor services.

Is there a downside to refinancing a mortgage?

There can be downsides to refinancing a mortgage when:

  • costs don't justify it
  • you are nearly through with your loan repayment

Why should you never refinance?

Refinancing decisions should be taken after the required deliberation. Some borrowers who refinance to consolidate debt end up growing new loan balances that may be hard to repay. Further, sometimes refinancing leads to paying more over time because of fees and closing costs, a longer loan term, or a higher interest rate.

Do you start over when you refinance your mortgage?

Yes, refinancing involves taking out a new loan with new terms, you're essentially starting over from the beginning. However, you don't have to choose a term based on your original loan term or the remaining repayment period.


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