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Refinance a loan
You will prepay an existing loan before
its full tenure under two circumstances:
Interest rates have fallen substantially
compared to those that existed when you took the loan. You can then borrow
at the lower rate and use the money to prepay the old loan. However , there
are two costs to consider :
a) The prepayment penalty (refinancing
fee) charged by your original lender
b) The processing and administration
fee charged by the new lender.
Normally these two costs will add about
2% to your new cost of borrowing.
If the opportunity cost of savings
is lower than the cost of his original loan then you will prepay the loan.
e.g. If you are able to earn a post
tax return of about 12% on your savings by prudent investments, then it
does
not make sense to retire a loan that costs you 10% post tax. On
the other hand, if your savings in the Fixed Deposit account yield a return
of 7% post tax, it makes immense sense to retire your housing loan with
the cash in the Fixed Deposit.
AbodesIndia.com can help you judge whether
it makes sense to refinance his old loan using a new one, based on the
database of total cost of funding a new loan from each Housing Finance
Company.
Refinance your existing loan
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