Yamini Pahwa
6 mins read
Last updated on 7th March 2024
In today's economy, managing finances efficiently is more crucial than ever. For many homeowners, the burden of multiple home loans can be overwhelming – juggling different interest rates, payment schedules, and terms.
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However, there's a strategy that can simplify this financial maze while potentially saving thousands: combining all loans into one. This approach, often overlooked, can streamline your finances, reduce interest costs, and even offer tax benefits. A debt consolidation loan can help simplify the process by combining all loans into one. By consolidating your debts, you can save money on interest payments and reduce your monthly payments. Additionally, a debt consolidation loan can help improve your credit score. In this blog, we'll explore the ins and outs of consolidating your home loans, helping you make an informed decision that could significantly impact your financial health.
Understanding Home Loan Consolidation
Debt consolidation loan refers to the process of combining two or more existing home loans into a single loan. This option is typically available to homeowners who have maintained a good credit score, demonstrate stable income, and have sufficient equity in their property. Debt consolidation loan eligibility is not restricted to any specific type of home loan; it can include various forms of mortgages like fixed-rate or adjustable-rate mortgages. The goal is to streamline your debts into a more manageable form, ideally with better terms and interest rates.
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Should You Combine Two Mortgages Into One?
Consolidating multiple home loans can be a strategic financial move, but it requires a comprehensive evaluation of various factors. Here's a detailed look at what to consider:
Length of Stay in Home
Your future residential plans are pivotal when considering a home debt consolidation loan. If you anticipate relocating shortly, the costs incurred during the refinancing process, such as processing fees and stamp duty, might not be recovered through the benefits of consolidation. This is particularly important if your plan to stay in the home does not extend beyond the breakeven point of the refinancing costs.
Refinance Cost
The total expense of refinancing should be carefully weighed. These costs can include processing fees, legal charges, valuation fees, and other associated costs, which can be substantial. In India, these fees can vary depending on the lender and the loan amount. When planning to combine all loans into one, it’s crucial to have a clear understanding of these costs to assess whether the financial benefits of consolidation outweigh the expenses.
Credit Score
A high credit score is a significant advantage in obtaining favorable terms for a debt consolidation loan. Lenders view borrowers with high credit scores as lower risk, often offering them lower interest rates and better loan terms. If your credit score has decreased since you took out your original mortgage, it might be beneficial to focus on improving it before proceeding with loan consolidation. A better score can lead to substantial savings over the life of the loan.
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Interest Rates Comparison
One of the main motivations for consolidating loans is to secure a lower overall interest rate, which can lead to significant long-term savings. Compare the interest rates of your existing loans with the rate offered on the home debt consolidation loan. The objective is to ensure that the new loan’s interest rate is lower than the weighted average of your current loans' rates.
This process involves searching for a lender who offers a balance transfer facility at a lower interest rate, ideally with minimal or no processing fees. Once a suitable lender is found, the remaining balances of the existing home loans are transferred to this new lender. Subsequently, the borrower starts making payments towards this new, consolidated home loan to the new lending institution. Remember, even a small reduction in the interest rate can lead to a considerable decrease in the total amount paid over the life of the loan.
Example: Consolidating Two Home Loans
Raj and Priya, a couple residing in Hyderabad, India, have two separate home loans. Their first loan is a primary mortgage for INR 40 lakhs at an interest rate of 8.5% with 15 years remaining. They also took a second home loan for another property, amounting to INR 20 lakhs at a 9% interest rate with a 10-year term. Currently, their monthly payments are INR 38,000 for the primary mortgage and INR 21,000 for the second loan, totaling INR 59,000.
They consider consolidating these loans into one, aiming to lower their monthly outlay and simplify their financial management. After careful evaluation of their long-term residential plans, refinancing costs, excellent credit scores, and current loan interest rates, they find a consolidated home loan offer at a 7.5% interest rate for a 15-year term. This consolidation would reduce their monthly payment to approximately INR 50,000, offering significant monthly savings and simplifying their financial commitments. Despite the long-term interest cost being slightly higher, the immediate reduction in monthly payments and the ease of managing a single loan make consolidation a financially prudent decision for Raj and Priya.
Home's Value
The success of refinancing for consolidation is contingent upon the current market value of your home. The value needs to be sufficient to cover the total amount owed on both the primary and any secondary mortgages. A professional appraisal will be a part of the refinancing process, determining the maximum amount you can borrow against your home. This is especially important for a home equity consolidation loan, where the available equity in your home plays a critical role in the loan amount and terms.
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The Process of Combining Home Loans
The first step in combining home loans is to assess your current financial situation. Review your existing loans, their interest rates, and terms. Next, research potential lenders – banks, credit unions, or online lenders – and compare their consolidation options. Once you choose a lender, the application process involves providing financial documents, such as income proof, credit history, and details about your property. The lender will then evaluate your application, which may include a property appraisal. Once approved, the new loan will pay off your existing mortgages, leaving you with just one loan to manage.
Final Words
Can I take 2 loans? or deciding whether to combine two home loans into one is a decision that hinges on multiple factors. It’s essential to carefully consider your long-term housing plans, the costs involved in refinancing, your credit score, the comparative interest rates, and your home's current market value. Evaluating these factors thoroughly will help you make an informed decision about whether mortgage consolidation is the right financial move for you.
FAQs About Combine Two Home Loans into One
Yes, it is possible to merge two home loan accounts. This process, commonly known as loan consolidation or balance transfer, involves transferring existing home loans from one or more lenders to a single loan with a new lender. This is usually done to take advantage of lower interest rates or better loan terms.
Yes, you can apply for two home loans simultaneously, provided you meet the eligibility criteria set by the lenders. This includes having a strong credit score, sufficient income to cover both loan repayments and a stable financial history. Lenders will assess your ability to repay both loans without defaulting.
Yes, under the Income Tax Act of India, you can claim tax deductions on the interest paid on two housing loans. However, the extent of the deduction may vary based on whether the properties are self-occupied or let out. It's advisable to consult with a tax expert to understand the specific tax benefits applicable to your situation.
To combine all loans into one, you can opt for a debt consolidation loan. This involves taking a new loan that is large enough to pay off all your existing loans, effectively merging them into a single loan with one monthly payment. This process usually requires a good credit score and may involve an appraisal if home equity is used as collateral.
In India, you can save tax on your second home by claiming deductions on the interest paid on the home loan. If the second home is rented out, the rent received can be adjusted against the interest payment, and the net loss, if any, can be set off against other income. If the second home is not rented, a notional rent is considered for tax purposes, and an interest deduction is allowed on it.
Yes, you can buy two houses next to each other and combine them, subject to local real estate laws and zoning regulations. This typically involves structural modifications and obtaining the necessary permissions from local authorities. Combining two properties can be a complex process and may require the services of an architect or a contractor to ensure compliance with all regulations.
Published on 4th January 2024
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