Should you refinance now?

nbsp;	Fine Print of Refinancing
		nbsp;	8226; The company document may say 8216;no processing fee8217; but may later charge an 8216;administration8217; or 8216;legal8217; fee. Ask for all fees to be charged in writing. 8226; There may be a clause stating 8216;No Prepayment Charges8217;. This actually means that no penalty will be charged if you prepay the loan on your own. However, if you get the loan refinanced and another company pays off the first, you may have to pay penalty. 8226; Ensure that your primary financier returns your original documents, before paying administration charges to the other company. 8226; Also check income tax benefits from the new loan. They may not continue since finance is for the same property and not a new one. For details, approach your tax advisor. 8226; If you are switching to a floating rate of interest, check whether the bank passes on the interest rate benefits to you automatically or not. Often, they expect the customer to approach them. Check what the rate is pegged to, sometimes it is pegged to a rate that the company keeps unchanged, even as rates around are falling.	nbsp;

Now six months later, seeing yet lower rates, Popat may refinance again. Popat has become quite a swinger with financing home loans, but what about you? Should you refinance your existing home loan? Yes, say a range of home-loan experts, but after doing some numbers. Says Nitin Chopra, head, Consumer Banking India, ABN AMRO Bank: 8220;Refinance makes sense for people with loans on high fixed rates of interest or for those with floating rates of interest whose companies have not passed on the benefit of falling rates to them8221;.

But don8217;t rush to change your company, says S C Jain, Director 038; Chief Executive LIC Housing Finance. 8220;First approach your parent company to convert your fixed loans to a floating interest loan,8221; he advises. LIC Housing Finance has a 8216;rewriting8217; offer, which basically rewrites a higher interest loan at a new lower interest rate by paying a 0.5 per cent charge on the remaining amount of loan. Remember to ask what the floating rate is pegged to, though. Loan companies have been found cheating by fixing a benchmark they control and keep unchanged. Consider the following points before you take the decision to switch.

Penalty

Most banks and housing finance companies charge a fine for early repayment of loan. Typically, this penalty ranges from 1 to 2 per cent of the principal left to be paid. Popat, for example, paid a 2 per cent penalty on his remaining loan of 11 lakh of Rs 22,000. Compare this cost with your annual savings in EMI due to the lower interest rate. Do this yourself or ask a chartered accountant friend to help you find the present value of the future stream of savings. Present value is nothing but today8217;s value of future rupees. If the present value of future savings is more than the cost of switching, go for it. For Popat the savings in switching were much more than his penalty, hence his decision to switch.

Some banks, don8217;t charge any penalty for prepaying the entire loan after a certain period of time, say five years. Some others, like Corporation Bank and Dewan Housing Finance, don8217;t charge a fine at all. Remember that the home loan rates are still falling, choose the next company carefully and look for one that imposes no, or a mild, penalty on foreclosure.

Processing charges in the new company

This is a charge you pay to your new financier. The fee can be anything between 0.25 to 0.5 per cent of the total loan, depending on the financier and your negotiation skills. Take note of the fact that the dog-fight between home-loan companies allows you to negotiate on the interest rates and service charges. Use you vegetable bargaining skills here to hammer down
this rate.

Time left to repay loan

The time left to repay your loan determines whether it makes sense to shift at all. 8220;If there are only one or two years left for repayment, then it8217;s not worth shifting,8221; says Subir Gokarn, Chief Economist of Crisil. This is because the cost of conversion comes to be higher than the amount you will save in a lower EMI. If there is no pre-payment penalty, then going for a home-loan that is soft loaded in front, that is, it has a lower rate in the first couple of years is a good strategy. See box

So, go ahead and shop for a cheaper loan. Just remember to work out cost versus benefit and look carefully at the fine print in the new deal that you work out with your company.