Planning to rework your loan?

[Kalyan]

Planning to rework your loan?

Weigh the pros & cons before changing the lending partner.

What do you do when a relationship just isn't working out? Chances are that either you will try to get together to iron out the differences or walk out of it and start a new relationship. When you take a loan from a housing finance company, your relationship with the lender is similar.

And the concept of 'refinancing' (or balance transfer) is like getting out of a relationship and giving yourself a new lease of life. A second life to correct your mistakes. So if you are a home loan borrower who thinks that you made a mistake while choosing your partner housing finance company, here's your chance to redeem the blunder.

source : economic times

[Kalyan]

How to decide

Refinancing, say financial planners, can be done in good as well as bad times. So it doesn't matter if interest rates or real estate prices are rising or falling. When you refinance your home, you avail of a new loan and use the same to pay off the existing home loan. Thus, typically, a refinance option is exercised in the following scenarios:

Scenario I:

You avail a new loan at a lower rate of interest thereby reducing the interest payments

Scenario II:

You want to reduce the monthly loan repayment. You take a new loan for a longer period than the existing loan

Scenario III:

You want to reduce your total interest cost over the period of the loan and pay the loan faster. You therefore take a new loan for a shorter period than the existing loan

Scenario IV:

You want to switch from a variable rate loan to a fixed rate loan

Scenario V:

You need cash. You avail a new loan at an amount higher than what is outstanding on the old loan. The higher amount can be possible, either due to increase in real estate value or significant payout of the existing loan. For instance, if your house is worth Rs 200,000, and you owe Rs 130, 000 on the loan, you could refinance Rs 150,000 and take out Rs 20,000 in cash. As Amitabh Singh, partner - tax & regulatory services, Ernst & Young India, puts it refinancing is "not only an opportunity but also a lifeline."

source : economic times

[Kalyan]

Look before you leap

Personal finance experts advise a careful reading of all documents before closing the refinancing deal. This will allow you to ask any questions or raise any concerns, in case you have a doubt. "This would mitigate surprises on account of hidden out-of-pocket costs at closing.

Also, you should do a break-even analysis of how much money you can save and what will be the cost of refinance," says Singh. According to him, other than the closing fee which constitutes a major portion of cost of refinance, lending company normally charges fee like application fee, processing fees, appraisal fees, loan origination and new title fees, which you should inquire about.

source : economic times

[Kalyan]

Avoid relying on published rates

You must avoid relying on published rates. The rate you will have to pay eventually depends on a number of factors such as amount of the loan, credit score. Financial planners say the process becomes easier if you are specific about the loan. "The more precise you are, the easier it will be for the lending company to find the best rate. The answers to this will depend on several factors, including when you plan to sell the house and how soon you want to retire the debt," explains Singh.

A word of caution - if you have taken a home loan insurance cover, then you should analyse the impact of refinancing on the same. Make sure that you do loan shopping. Contact at least three lending companies to find out the structure of charges levied on refinancing. Last but not the least, find an honest, service-oriented lending company. "Dealing with the right lender could make your loan experience a lot more beneficial, saving a lot of money and time," feels Singh.

source : economic times

[Kalyan]

Case study

Borrower (Mr X) has a home loan with Bank Y of Rs 2,000,000 with the interest rate of 12% for 10 years. The details of his repayment: Equated monthly installment (EMI): Rs 28,694 Total interest cost over period of loan: Rs 1,443,302

After two years, the position of Mr X: Total paid to Bank Y: Rs 28,694 X 24 = Rs 688,656 Principal component in the above payment: Rs 234,512

Interest component in the above payment: Rs 454,144 Principal outstanding after two years: Rs 2,000,000 - Rs 234,512 = Rs. 1,765,488

Mr X now decides to take the new loan from Bank Z of Rs. 1,765,488 with interest rate of 10% for eight years (balance years) and pays back the loan of Bank Y. The details of his repayment: EMI: Rs. 26,790

Total interest cost over period of loan: Rs 806,333 With the above refinancing, Mr X would save an interest cost of Rs 182, 855 as depicted below: Interest already paid to Bank Y: Rs 454,114 Add: Interest payable to Bank Z over 8 years: Rs 806,333

Total interest cost (A): Rs 1,260,447 Interest cost that would have been had he stayed with Bank Y (B): Rs 1,443,302

Savings in interest cost (A) - (B): Rs 182,855

source : economic times

[dhoni]

this details gives more useful
with this we can easily rework of our loan