How To Tally Costs And Savings When Opting For A Home Loan Refinance
When seeking a refinance loan, one tends to get attracted to the idea of low refinance interest rates offered by new lenders. However, apart from the prospect of savings, a house loan refinance also involves various costs, and without taking these into consideration, you may end up paying more than you signed up for. Thus, before you arrive at a decision, it is important to evaluate whether the gains from the refinancing would be more than the expense. Below are the major costs and savings you stand to encounter.
What are the costs included in refinancing?
- Application fee: This is the basic fee that you will pay to the lender when you apply for a refinance. It includes costs like administrative costs, loan origination fee and appraisal cost. The application fee varies depending upon the policy framed by the lender.
- Prepayment or transfer penalty: For those who are prepaying and who seek to refinance their home loan only for the purpose of lower interest rates, the lender may charge a hefty prepayment or transfer penalty equivalent to several months’ worth of EMIs. Again, this penalty varies from lender to lender.
- Fee for reviewing and closing the account: After you have paid the application fee and penalty wherever applicable, the lender may charge you a final and separate fee for reviewing all the refinancing documents before closing the account.
Apart from this, your new lender may also charge you processing fees to take over your home loan.
What are the savings from refinancing?
- Savings from income: If your previous lender charged exceptionally high interest rates and you sought a transfer to a new lender with low refinance rates, you could increase your income saving. Even a marginal saving every month, when compiled, could add up to a huge amount that you could invest elsewhere or put to productive use.
- Savings from fixed interest rates: While some lenders have floating interest rates, others have fixed interest rates. Unlike floating interest rates, fixed rates do not fluctuate on the basis of the market forces of demand and supply. They are based on rigid systems like MCLR or base rate that is set by the RBI. Hence, if your new lender has low interest rates that are fixed, then it is likely that they won’t change much over a long period and help you plan your repayment better.
- Savings from absence of prepayment penalty: When you shift to a new lender who has no penalties for prepayment, you could gain from prepaying your principal amount. Hence you are saved the cost that your old lender would have charged in the form of a prepayment penalty.
- Low interest on top-up loan: Lenders are constantly offering incentives on top-up loans for potential borrowers seeking a refinance. Thus, you could benefit from this and end up paying significantly lower interest rates on your top up loan and also enjoy a long tenor. Often of a substantial amount, a top up loan can then be used by you for a variety of purposes.
Home loan refinance entails various costs as well as savings, and thus its advantages vary from case to case. At Bajaj Finserv, you can enjoy the gains from low interest rates of about 8.05% when you apply for a refinance. With affordable EMIs, you will also benefit from excellent customer service and added offers like a 3 EMI holiday!