Home loan refinancing
Source : hdfc

The dream for owning a home translates into reality once you put the necessary finances in place. Mostly, people buy a home out of savings or via home loans or a combination of both. If one takes home loans, the burden of paying high-cost EMIs remains one’s biggest worries. What if there was a way out of it that you have overlooked or haven’t bothered to pay close attention to?

We are talking about refinancing your loan. Transferring the balance of the home loan to another financing company is called refinancing of the home loan. The transfer from one lender to another at a lower rate of interest comprises refinancing.

Either a top-up from the bank where the bank adds up on the existing home loan or the whole principal amount getting transferred to another lender at a lower rate of interest comprises the process of refinancing. The unpaid amount is returned back to the original lender and the EMIs now have to be paid at the new rate of interest to the new lender.

A cost-benefit analysis of the property would give you an understanding of the benefits and risks in the process of loan transfer and forms the first step in opting for refinancing. So, if there is a profit even after paying charges on loan transfer to another lender, then it makes sense to opt for one. In fact, the most important point is that the margin of profit would give you the confidence to opt for the transfer.

These are some of the benefits of refinancing:

Rates of interest

First and foremost reason for transfer of loan from one lender to another is lower rates of interests. If one is paying a higher rate of interest as well as more EMIs, it makes all the more sense to switch to a new loan offering a much lesser interest, thereby reducing the EMI. As the savings are increased, it helps in reducing EMIs.

Time period of loan

There is an inversely proportional relationship between EMI payments and tenure of loan. The EMIs are reduced if the time period of loan is longer and vice versa. However, there is a direct proportional relationship between interest and tenure. Longer the tenure, higher the interest paid. Windfall incomes, bonus or promotion can help one shorten the tenure and pay off debts early.

More loan opportunities

Even though any kind of a loan is a debt, loans help one to safeguard their financial stature and help one take immediate decisions without waiting for savings to rise up to the occasion. One can get additional loans for renovation, registration or expansion of homes if one opts for refinancing of loans.  But make sure, you go for top-up of loans only at lower interest rates.

Save on tax

Certain housing finance companies can provide an individual taking a loan with certain tax exemptions and benefits. The interest paid on the capital loaned for additional work in the house like renovation, repairs, acquisition, reconstruction or renewal of property is eligible for deduction under Section 24 of the Income Tax Act. The maximum amount of deduction is Rs 2 lakh in case of an owned property and no deduction in case of a rented property.

Opt for diversification

One can also refinance to reduce the monthly EMIs and opt for longer tenures. This is a stand-by option till a better investment option is found. It will help you think about the long-term payment or part-payments of a loan.