Should I refinance?
Refinancing lowers your monthly payment or shortens your term (or both) by taking out a new loan at a better rate to pay off the old one. But it costs money upfront — usually 1-5% of the loan amount in fees, plus any prepayment penalty on the old loan.
The break-even point is the number of months before the monthly savings recover the refinance fees. If you plan to keep the loan past that point, refinancing makes sense.
When refinancing makes sense
- New rate is at least 0.5-1% lower than current rate.
- You plan to keep the loan longer than the break-even period.
- Your credit score has improved since you took the original loan.
- You want to switch from adjustable-rate to fixed-rate (or vice versa).
- You want to shorten the term without dramatically increasing EMI.
FAQ
Does refinancing hurt my credit score?
A hard inquiry when you apply typically drops your score by 5-10 points, recovering within a few months. Closing the old loan and opening the new one also shows up on your report. Overall impact is minor and short-lived.
What fees are involved in refinancing?
Typical fees: processing/origination fee (0.5-2% of loan), legal/valuation charges, stamp duty (varies by state), and any prepayment penalty on the old loan (most Indian floating-rate loans have no penalty for individual borrowers).