Refinancing and home improvement loan

Home loans are repayable over a long tenure. Few can, therefore, predict with certainty whether the interest rates will fall or increase during such period.People who took home loans 7 to 8 years ago, contracted to pay higher interest rates on their home loans than those who took home loans, merely 4 years ago. This disparity gave lenders an opportunity to capture these borrowers from other lenders. Effectively, these new lenders offered to charge lower interest rates on outstanding home loan balance, provided the borrower shifted over to them. From lenders perspective, the process was faster method of processing home loans as already another bank or credit union had done the required due diligence. This process is known as refinancing a home loan.


At times, these new lenders offered to give more loans. Effectively, they offered to fill up the difference in the equated installments due to decrease in interest rates. Of course, the track record of the borrower was important for any additional loans.


To counter this, the existing lenders also agreed to change the method in which the home loan interests were charged, and bring down the interest rates. These lenders also stipulated a penalty for prepayment of loans. Effectively, they made it uneconomical for the borrower to move over to the new lender, as the new lender also charges some processing and administration fees.


Since the existing lender was willing to refinance the home loans, most borrowers opted to avail such refinance. Borrowers who had contracted to pay interest on fixed interest rates shifted to adjustable interest rates.


In fixed interest rates, interest remains steady throughout the loan period. Unlike it, adjustable interest rates vary based on an agreed index. Effectively, borrower were refinancing their home loans, only the rate of interest on their home loans had undergone a change, as also the manner in which such interest rates were calculated.


Their home loans still entitled them to the same tax sops as they were entitled to previously. Moreover, if the interest rates increased beyond a specified rate, the tenure of repayment stood increased automatically, unless borrower chose otherwise. This flexibility was welcome.


Home improvement loans are granted to borrower for major repairs undertaken to their homes. It is an entirely different category of loans. The principal repaid under this category is not eligible for deduction from income of that year for tax purposes, unlike home loans, and refinance of home loans.


Home improvement loans are granted for a shorter term when compared to home loans and refinancing of home loans.


In addition, home improvement loans carry higher interest rates. The similarity between home improvement loans and home loan refinance is that both are repayable in equated monthly installments. For availing both loans, the residential property has to be mortgaged in favor of the lender. Home improvement loan is granted if and only if the borrower is the owner of the residential property, which is to be repaired. Unlike it, home loans are granted to enable the borrower to buy the property. Therefore, strictly speaking, borrower may avail the loan without being the owner of the property.


Since ownership of the property is pre-requisite for home improvement loan, any borrower who has taken a home loan or refinance on home loan, can avail home improvement loan only from the same lender, simply because the documents cannot be broken down to secure two different types of loans. In view of this, many lenders have come up with refinancing and home improvement loans that cover all the requirements of homebuyers.


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