What is Re-financing?

Refinancing

If a borrower wants to have a change of the rules/terms or interest rate or payment period of the existing lender, he opts for a new lender. This is called as refinance. In a refinanced loan, the old loan is paid off with the new loan, and the old terms are replaced with new terms.

The concept of Refinance:

Many times when the home loan borrowers get overburdened with the interest rates of the bank, they decide to move to another bank offering better interest rates.

For example last year, RBI had slashed down the rate of interest for home loan borrowers. Banks like HDFC and SBI had slashed the interest rates by .15% in their lending rate but many banks were not willing to offer this leverage to their existing customers; but, the new home loan borrowers can avail this sliced interest rates.

Under such circumstances, the borrower might prefer for a refinance, to enjoy the benefits of the new customer.

The following information will be checked when you apply for refinance:

  • Your credit score and payment history.
  • Your income and employment history.
  • Your assets (stock, retirements and savings accounts).
  • An appraisal to determine the current value of your home.

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Types of Refinance

Considering the Indian market scenario, here is the classification of refinancing loans:

  • Rate and Term:  This is the most common type of refinance. Here you can replace the existing loan with a new one with new interest rate, new timeline (optional) and new terms.
  • Cash Out: In case you are willing to mortgage a large amount, then cash out is a good option. With cash-out refinancing, you refinance your mortgage for more than you currently owe, then pocket the difference. Be aware where and how you spend the extra amount.
  • Cash In:  A cash-in refinance is the opposite of a cash-out refinance. When you execute a cash-in refinance, you bring money and pay the new lender and lower the loan amount, either to qualify for the loan or to retire fast from the loan.
  • Short Refinance: . Here your existing bank may agree to pay off(refinance) your existing loan by replacing it with a new one, making it more cost effective for the borrower. But this might hurt your credit score.
  • No-Closing Cost: Here you can get a new loan after paying upfront fees of considerable amount. But make sure that you only pick up this option when your existing interest rate is lower than the present interest rate by at least 1.5%

Factors you should consider before refinancing your home loan :

  • Interest rates – Never ignore this factor while you plan for refinancing your existing home loan. It is advisable that you should search in a number of banks to make a comparative analysis of the interest rates so that you can find out which bank offers the best rates.
  • Processing charge: Getting your loan refinanced from another bank may require the bank to process your application which makes you liable to pay a processing fee which could be between .5% to 1% (depending on the bank you are opting) and hence, we suggest that you should always compare the savings you make while opting another bank. If the saving amount is significant go ahead with refinancing.
  • Tenure of the loan – Tenure and EMI are inversely related to each other, if you want a lesser tenure go for higher EMI and vice versa. Few banks do not agree on reducing the loan tenure, under such situations, no wonder you might opt for a refinance, provided you also have a lesser interest rate when compared to your existing lender’s.
  • Be calculative while planning to refinance. It’s not mandatory that refinance will always reap benefits to you and hence, you need to meticulously calculate the amount you will save while applying for refinancing. Different banks have different exit policies and penalties; some might go up to 4% of loan amount, thus, calculate the amount and then go ahead with refinancing.

Advantages of Refinancing / Reasons for Refinancing :

  • It lowers the monthly payment as you opt for a lower interest rate.
  • It makes it easy for you to plan and pay off your loan if you refinance your new home loan from floating to fixed interest rate, as you have a planned EMI.
  • Consolidation of debts for, there will be a reduced EMI.
  • Change of maturity of the loan. Refinance is the best only if you opt for a lower tenure at a lower interest rate.

Ask yourself before you go for Refinancing : 

Before you contact a refinance lender, make sure refinancing makes sense for you. Ask yourself these questions:

  • Is there a prepayment penalty on my current mortgage?
    Though the RBI had removed the pre-payment charges, the banks and NBFCs still ask for a penalty if the loan amount crosses certain limit. So, find out if you will be charged a “prepayment penalty.” The amount varies, but it can add up to several months’ worth of interest payments. Ask your lender.
  • What are the costs of the new mortgage?
    Lenders almost always charge fees for taking out a new loan. These can add up depending on the size of the loan. The charges could include application fees, insurance fees, plus title search, insurance and legal costs. However, many of these fees are negotiable and are different from lender to lender. Make sure to shop around and compare all associated costs and fees of your refinance.
  • Will my tax savings be reduced?
    If you claim mortgage interest on your tax return, refinancing to a lower rate will mean that you’ll have less mortgage interest to deduct. That means you might have to check with your tax adviser to see if your overall savings will be increased if you refinance.

Our role: Loanyantra is a complete solution guide to the home loans existing in India. We are the first real-time loan monitoring system that work dynamically as the market changes. Our continuous monitoring and market analysis always keep you posted on the latest development and changes in the home loan market and your loan status. Apart from loan management, we work on refinancing and balance transfer as well. Our sole objective is to make sure that all the customers of Loanyantra are able to close their loan easier and faster.  

Know more on how to add a co-borrower while you refinance your home.

How to add a co-borrower when you refinance a home?

Know more about cost of switching home loan from one lender to another

Cost of switching home loans to new lenders?

 

Does a co-applicant help when getting a home loan?

A co-applicant for home loan is someone who applies for a loan with you. Usually it’s a family member, such as a spouse, or a father applying with an unmarried son or daughter. A co-applicant also can be a business partner if both parties will own the property bought with the loan. Having a co-applicant for home loan increases your chances of approval and of getting a low interest rate.

Improved Creditworthiness

Even though your credit score is just a number, lenders place a large emphasis on it because it predicts how likely you would be to default on the loan. If your own credit score is low, or if your co-applicant’s credit score is high, having a co-applicant for home loan makes your application stronger overall and increases your chances of approval.

co-applicant for home loan _loanyantra.com

Lower Interest Rate

Even if you’d be likely to be approved on your own merits, a co-applicant can help you get a lower interest rate on the mortgage. Lenders reserve the lowest interest rates for loans that pose the smallest risk of default. By adding another creditworthy borrower to your application, you lower the bank’s risk. The bank might reward you with a lower interest rate than you’d pay when you were the only one applying for the loan.

Higher Income

A co-applicant’s income is included when determining how much of a loan the bank thinks you can afford. Adding a co-applicant might mean that the person’s income is added to yours when the bank considers how much to lend you. For example, say the bank doesn’t want payments to exceed 25 percent of your monthly income. If you have a monthly income of Rs.40,000, your maximum monthly payment is Rs.10,000. But if your spouse brings home another Rs.40,000 per month and becomes a co-applicant, your maximum monthly payment goes up to Rs.20,000.

Legal Requirements

In some cases a co-applicant is required on loans, so applying without one means you’d automatically be denied. Typically, if you’re applying for a secured loan, any co-owner of the property must be a co-applicant. For example,  Similarly, if you and a business partner are buying a store, you both must apply together for a mortgage.

How to add a co-borrower when you refinance a home?

Refinancing is a way to create a new mortgage loan and lower your interest rate and house payment. When refinancing a mortgage, your lender reassesses your income and debt. Any change to your financial situation, such as a decrease in income, an increase in debt or a lower credit score, can affect your ability to refinance. If you fear that a lender will deny your refinancing application, you can add a co-borrower to the new mortgage. This can include anyone but typically would include a family member such as a spouse, parent or sibling.

Step 1

Ask your preferred co-borrower if she is willing to put her name on the refinance application. Make sure she understands that she is responsible for ensuring the loan payments are made on time and in full, or her credit score will suffer.

Adding a co-borrower to refinance _Loanyantra

Step 2

Check your credit report as well as your co-borrower’s report to see whether you qualify for a refinance.  You can also get your credit score from CIBIL. Know more –  http://loanyantra.com/blog/how-is-your-cibil-score-calculated/

Step 3

Contact your existing lender or a new lender to get an application to refinance the home loan. When you fill out the application you will be asked to include your information and the co-borrower’s information. This includes both names, telephone numbers and Social Security numbers. Be sure both of you sign the mortgage refinance application.

Step 4

Submit the application along with other information the lender requests. This typically includes copies of your tax returns, bank statements and recent paycheck stubs. Since you’re applying for a refinance with a co-borrower, the lender will take both incomes and employment records into consideration.

Step 5

Wait for the lender to make his decision. If he approves the loan, you and the co-borrower will need to attend the loan closing and sign the mortgage papers. If the lender approves the refinancing and adds the co-borrower to the home loan, both parties must attend the loan closing. You’re both equally responsible for the loan, and closing on the loan is dependent on both signatures on the mortgage agreement. The new mortgage replaces the old loan.