Home Loan Refinance Calculations: Buying a home is an important financial goal for most people. Since real estate rates are rising, home loan tickets are also getting bigger. It is common when the interest a borrower pays in a home loan surpasses the principal amount. Specially in long-duration loans such as 30 years, it can be more than twice the principal amount. However, there are some tactics to reduce the home loan interest. Repayment, paying an extra EMI, or refinancing are some of the ways to reduce the interest burden.
During your loan repayment, there may be instances when your lender may offer refinancing at a lower rate.
You may also receive calls from rival lenders who are ready to refinance your home loan at a lower rate.
But it is worth every time, given it may also have refinance costs.
Should you consider the offer? See what calculations suggest!
Refinancing options
You may be in two kinds of situations where your own lender or a new lender may offer you refinancing; let’s see the pros and cons of both options.
Pre-closure
If your current lender is offering a refinancing, it is converting the loan from one benchmark to another.
It is not closing your existing loan, so you don’t have to pay pre-closure charges.
However, when a new lender disburses a loan, it can ask you to close your existing loan.
As a result, your current lender may ask for pre-closure charges.
Application process
Your current lender won’t ask for it, but a new lender will have an extensive application process.
Documents required
The current lender already has your documents.
The new lender will ask for your proofs of identity, income, and address; property documents; sale deed; agreement to sell; etc.
Processing fee
It will be applicable in both cases, but in case of a new lender, legal fees, MOD charges, other charges, and pre-EMI interest will also apply.
Turnaround time
The current lender may take a week, but a new lender will take 1-3 weeks.
When is the best time to refinance?
Refinancing in the first half makes more sense.
When your focus is on interest payment, a lower rate can lead to big savings.
When the huge part of the homeownership cost is loan interest.
A loan cheaper by 50 basis points or more could lead to a shorter loan tenor, lower EMIs, and large savings.
When there is an improvement in your credit score (750 or above), income stability will allow you to access the best loan offers.
When the projected savings from refinancing exceed the costs, you should consider refinancing.
Calculations for refinancing
Here, we are taking the projections of a Rs 1 lakh loan taken at a 9 per cent interest rate for 20 years, where the loan paid is Rs 28,974 and the loan left is Rs 71,026.
In such a case, the EMI will be Rs 900. We will show you 3 scenarios.
When you don’t refinance
Interest paid– Rs 78,993
Interest left– Rs 36,941
If more than 50 per cent of the home loan is paid, a better option may be to accelerate payment and get out of debt.
When you refinance
Suppose you refinance your 9 per cent loan to 7.85 per cent, you may save 6.37 per cent per amount per lakh.
Earlier rate: 9 per cent
New rate: 7.85 per cent
Loan left: Rs 71,026
Years left: 10
New EMI: Rs 856
Monthly savings: Rs 44
Interest saved: Rs 5,233
Refinance cost (1%): Rs 710
Net savings: Rs 4,522
Per lakh savings: 6.37 per cent
When you refinance and pay same EMI
In this case, you refinance your 9 per cent home loan at 7.85 per cent but keep the EMI the same.
New Rate: 7.85%
Loan left: Rs 71,026
Years Left: 9 & 3 months
Same EMI: Rs 900
EMIs saved: 9
Interest saved: Rs 7,719
Refinance Cost (1 per cent): Rs 710
Net savings: Rs 7,008
Per lakh savings: 9.87 per cent
(Disclaimer: This is not financial advice. Do your own due diligence or consult an expert for financial planning.)
