Consider you taking out a mortgage years ago when rates were high. Now, with interest rates dropping, the idea of refinancing crosses your mind.
But does it really make sense?
Say you have a loan of ₹25 lakh. Refinancing at a lower rate could slash thousands off your total interest!
According to the Reserve Bank of India, as of October 2024, the average home loan interest rate is around 6.5%. If you can reduce your interest from 9% to 6.5%, your monthly payments could dip by nearly ₹3,000.
Let’s find out the specific benefits and see how refinancing can make a big impact on your finances.
Lower Interest Rates and Monthly Payments
The biggest reason people consider refinancing is simple—saving money.
If you can switch to a lower interest rate, your monthly outgo immediately reduces. Imagine a 25 Lakh personal loan at 9% interest over 20 years. Your EMI would be about ₹22,493. Now, if you refinance at 7% interest, that EMI drops to around ₹19,381. That’s a direct saving of over ₹3,000 every month, or ₹36,000 each year!
This reduction doesn’t just ease monthly budgets; it cuts down the total interest over the loan’s life, potentially saving lakhs.
So, ask yourself: Could this extra cash help you achieve other financial goals? From investing to saving for your child’s education, these savings open new doors.
Shorten Your Loan Term for Long-Term Gains
Looking to pay off your loan faster? Refinancing can help you switch from a 20-year term to a 15-year term. Yes, this may increase your EMI slightly, but the trade-off is massive savings in interest.
Scenario 1: Standard 20-Year Term
- Loan Amount: 25 Lakhs
- Interest Rate: 8%
- Term: 20 years (240 months)
- EMI: Approximately ₹20,911
Over 20 years, the total interest paid would be around ₹25.18 Lakhs. This means you end up paying a total of ₹50.18 Lakhs for the loan.
Scenario 2: Reduced Term to 15 Years
- Loan Amount: 25 Lakhs
- Interest Rate: 8%
- Term: 15 years (180 months)
- EMI: Approximately ₹23,873 (increase of around ₹4,000)
By reducing the term to 15 years, the total interest paid drops to around ₹18.97 Lakhs. In this case, your total payment becomes ₹43.97 Lakhs—saving you around ₹6.21 Lakhs in interest.
This shows how a shorter term, even with a slightly higher EMI, can save you a lot of money and bring you closer to debt-free ownership much sooner.
Unlock Your Home Equity for Financial Flexibility
| Use | Estimated Cost (₹) | Benefit of Refinancing | Home Value Increase (%) | Savings (₹) |
| Home Renovations | 10 Lakh | Boosts property value | 15% | 1.5 Lakh |
| Higher Education | 5 Lakh | Supports family financial goals | 0% | 0 |
| Medical Emergency | 2 Lakh | Reduces need for high-interest loans | 0% | 0 |
| New Car Purchase | 7 Lakh | Cheaper than an auto loan interest | 0% | 20,000 |
| Investment in Stocks | 3 Lakh | Potential growth of wealth | 5-10% | Varies |
Through a cash-out refinance, you can access funds for various needs without piling on high-interest debt.
Switch to a Fixed-Rate Mortgage for Stability
If you’re currently on an adjustable-rate mortgage, you might feel anxious when rates go up. Refinancing to a fixed-rate mortgage offers peace of mind. Fixed rates mean no surprises, and you can plan your finances around consistent payments.
If you have a 25 Lakh personal loan on a variable rate, you could face increased EMIs in a rising market. By switching to a fixed rate, you lock in stability, helping you stay financially secure even when markets shift.
Eliminate Private Mortgage Insurance (PMI) for Extra Savings
Have you built up 20% or more equity in your home? Refinancing allows you to remove PMI, a fee that serves only to protect the lender, not you.
PMI can cost between ₹1,000 to ₹3,000 per month on a standard 25 Lakh loan. Eliminating PMI means additional savings every month, boosting your financial health without any effort on your part.
Conclusion: Make Refinancing Work for You
Refinancing is a strategy to reach financial freedom faster. So, if you’re holding onto a 25 Lakh personal loan and market conditions look favourable, consider refinancing as a way to enhance your long-term savings and security.
Are you ready to make your mortgage work harder for you?
FAQs
Is refinancing worth it with a 25 Lakh personal loan?
Yes, especially if you can reduce your interest rate by even 1-2%.
How much can I save by refinancing a 25 Lakh personal loan?
Savings can vary but could be as high as ₹3,000 monthly if rates drop by 2%.
Can refinancing help me pay off my mortgage sooner?
Absolutely. Choosing a shorter term reduces your overall interest costs significantly.
What are the main costs of refinancing?
You’ll have to consider processing fees, legal charges, and possibly appraisal fees.
