Myths of Home Refinancing Busted

With rising interest rates, many home loan borrowers suffer from a notion that there is no point in home refinance. Some relatively new borrowers also wrongly believe that refinancing your home can only happen if you have repaid your home loan to a major extent. Others think unless you have enough money with you, refinancing your home is only a dream. If you thought about one or all, do not worry. These are home refinancing myths. Refinancing your home loan can actually boost your financial health, by reducing monthly EMIs or reducing the amount of interest you might end up paying in the costlier existing loan.

Myth 1 - Refinancing is costly

Banks in India levy a pre-payment penalty of around 2-5% of the outstanding principal amount in case the home loan borrower decides to refinance home loan from a different bank. Also, once you have agreed to refinance your home loan with a new bank, the new bank will charge you a processing fee. This processing fee is roughly 0.5-1% of the principal amount. In both cases, these fees are only a fraction of the total cost you will save by doing a home refinance. Sticking around with an expensive home loan drains money, not in one-shot, but gradually. So, bear the small refinance cost and save a lot more. Do not panic when you see the cost of refinancing. Many banks will allow you to roll these fees into the balance of your new loan. This would effectively mean that you may not have to pay the fees upfront when you close your home refinance. Instead, these charges or fees will be paid out over time. 

Myth 2 - You cannot switch from fixed rate to floating rate

After you have opted for a fixed rate loan, it may that in some time the overall interest rates start declining. In such a case, you will be paying higher interest rates even though home loan rates for others would have gone down. This is why you should switch. Do the switch over to a floating rate loan to save on interest cost. If your existing home loan lender does not permit you to do so, you can opt for home refinance with a new bank. There is no bar. To avail of the floating rate option, refinancing your home will be easy and smart option by switching over to another lender. Do not listen to any other advice. Switching from fixed rate to floating rate is one of the most common reasons why home loan borrowers go for home refinance. 

Myth 3 - Refinancing your home with the existing bank is better

This is a big myth that needs to be busted right away. Everyone is free to refinance with any mortgage lender that is licensed. If the existing bank is not agreeing to favourable terms for you, opt out. You have no moral or legal obligation to close your home refinance with the existing lender. You might think it is easier to work with your existing lender or bank, but this isn't actually true. The new lender or bank will do a lot of work for you, and save you from hassles that you may think are going to fall on your way. It makes a lot of sense to get quotes from several lenders or bank when refinancing your home. If you are lucky, you might get a lower interest rate or fees from a new lender/bank by doing a bit of comparison. 

Myth 4 - Interest rates are too low to make refinancing work

Overall home loan interest rates may be at multi-year lows, but rates will creep up. You might think that it no longer makes economic sense to go for home refinancing, but that is not a correct impression. Actually, your current interest rate for the home loan is what is important. If your home loan rate of interest is 8.9% and you can refinance for 8.35%, you will be saving money right from the word go. Calculate the savings on your home loan tenure, say 20 or 25 years. Refinancing your home for a cheaper interest rate works, and that is not dependent on overall interest rate movement if you select the right product.

With these home refinancing myths busted, it is time for you to you to do the right thing.