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What is the Meaning of Refinancing Your Mortgage Loan?

Refinancing is when a borrower opts to avail a new mortgage loan to replace a previous one. It helps to reduce the EMI amount a borrower is liable to pay.

When a lending institution provides a lower rate of interest compared to the existing lender, a borrower can benefit from it by refinancing his/her mortgage loan. In that case, the existing loan is shifted to the new lender leading to lower EMIs.

For the purpose of refinancing an individual can opt for a loan against property if they have equity over it.

There are other reasons as well for which individuals opt to refinance –

  1. To shorten their mortgage tenure.

  2. To convert from a fixed rate of interest to a variable rate of interest or vice versa.

  3. To consolidate debt.

The main purpose of refinancing a mortgage loan such as loan against property is to save money on repayment. However, when refinancing, the existing lender levies a one-time processing charge which is a certain percentage of the remaining loan amount.

This charge should be factored in when calculating a borrower’s profit from the entire process. It might be so, that the aggregate amount which is to be paid by the borrower exceeds what he had to pay before refinancing. The difference between the processing charge and change in total EMI payable is what an individual benefits or loses from refinancing.

Therefore, you should calculate beforehand if the processing charge is more than what you plan to save from it. For this purpose, you may use the mortgage calculator to estimate if you will gain anything from the refinancing.

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