What lies beyond the teaser rate?

Over the past few weeks, a full-blown price war has erupted in the home-loan sector. Right from the moment one bank reduced its home loan rates to about 8 per cent, others have been forced to follow suit. So where does this leave you, the borrower?

Well, in a fairly comfortable position really, because who doesn’t want to benefit from cheaper home loan rates. However, while these low rates are tempting, we would caution borrowers to understand all aspects of cheap home loan rate schemes and the process associated with it, and suggest a few useful tips to think about when considering a home loan.

First of all, remember that these recently announced low rates are only for new loans, and not for existing loans. But whether you are a fresh borrower or an existing one, you want to take advantage of the new lower-rate environment. So let’s take each of these two cases starting with existing borrowers.

If you are an existing borrower

If you took a home loan in the last few years, chances are that you pay a rate close to 10 per cent. Now that rates have fallen to close to 8 per cent you are probably wondering what you can do to save money. Most rational people would like to “refinance” their more expensive home loan to something cheaper, as long as it makes economic sense to do so, i.e., the cost of the refinance is not expensive.

This process of refinance is known as balance transfer — you transfer your outstanding home loan balance from one lender to another. The way it works is that the new lender pays your old lender the money outstanding on your loan. Your obligation for repaying the outstanding amount is now towards the new lender.

source: http://www.indianexpress.com/news/what-lies-beyond-the-teaser-rate/513712/