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Knowing how the numbers work greatly helps in securing the right mortgage Image Credit: Shutterstock

It’s exciting to finally have no more home loan payments pending. But now that you have all that equity in your home, is it possible to get another mortgage to use for other purchases?

You bet you can. Lenders will definitely accommodate using the equity you have built up in your home to give you a loan for other needs.

Lenders will definitely accommodate using the equity you have built up in your home to give you a loan for other needs.

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Any loan that isn’t considered a purchase is called a refinance — despite that fact that there isn’t a loan to pay off.

But taking out a mortgage on your paid-off house is a big decision, and you really need to think about the ramifications.

Don't be hasty in borrowing against your home!
Anytime you are taking money against your property, you are taking a debt that you didn’t have before, so how you will repay that loan is something to consider.

Matter experts recommend that if you need money, you consider another way to find that money.

For example, if you need to pay for your daughter’s college tuition and she needs a car, too, there might be several ways to find the funds instead of getting a new mortgage.

Maybe your daughter can apply for a student loan through her college or the government, and you can acquire a low-interest car loan for the car she needs.

Let’s anyway look at refinance loan options for when your house is paid off

No-closing cost: In no-closing cost refinance, one get new mortgage loan after paying some upfront fees.

This refinance type is suitable for you if the current market rate is lower than your existing interest rate at least by 1.5 percentage points. However, one needs to pay Yield Spread Premium (YSP) to the mortgage company for that.

A yield spread premium is the money or rebate paid to a mortgage broker for giving a borrower a higher interest rate on a loan in exchange for lower upfront costs.

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Cash-out refinance: Cash-out refinancing occurs when a loan is taken out on property already owned, and in which the new mortgage is for a larger amount than the existing loan amount in order to convert home equity into cash.

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Refinancing can be a tool to shorten the loan period or reduce the monthly instalments Image Credit: Shutterstock

Home equity line of credit (HELOC): The loan may be offered as a bundled package with a credit card allowing you to make withdrawals on the loan or through cheques.

Monthly payments will depend on the amount borrowed and the interest rate. Like a credit card, you can re-borrow the amount repaid.

How does cash-out refinancing work?
Cash out refinancing occurs when a loan is taken out on property already owned, and in which the new mortgage is for a larger amount than the existing loan amount in order to convert home equity into cash.

Reverse mortgages: A reverse mortgage is a mortgage or home loan, usually secured by a residential property, that enables the borrower to access the unencumbered value of the property.

The loans are typically promoted to older homeowners and typically do not require monthly mortgage payments.

Breaking down what option suits you best

Reverse mortgages are typically promoted to older homeowners and typically do not require monthly mortgage payments.

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If you need house repairs, it is often recommended that a home equity loan (or HELOC) may work out better in the long run.

If your home is paid off, you can apply for a home equity loan without much hassle.

However, a HELOC should be put in place before any emergency happens. It lasts 10 years, and you never ever have to take money out of it. But if you need it, it is there.

HELOC should be put in place before any emergency happens!
Keep in mind though, if you haven’t set up a HELOC and your life partner breaks his or her leg and can’t work, the lender won’t then give you the equity line of credit.

It doesn’t cost anything to set up a HELOC. This is a very inexpensive way to set up some security for the future. If you do a cash-out refinance, then you’ll have to pay closing costs. A HELOC is the cheapest money you’ll ever get.

With a cash-out refinance, you can take out 80 per cent of the home’s value in cash. For some people, taking out a cash-out refinance for an investment can be quite profitable.

Cash-out is suitable for home improvement as well as credit card and other debt consolidation. Here you can refinance larger amount than your existing mortgage. You can keep the cash difference with you.

For some people, taking out a cash-out refinance for an investment can be quite profitable.

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Credit history plays a big role in a bank’s decision to extend a home loan Image Credit: Shutterstock

Let’s say you take out INR100,000 (Dh4,825) cash from a refinance and invest it into creating more assets. If you put back more than what it cost you, then great.

Reverse mortgages can help older homeowners with things like medical expenses.

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Like India, most governments doesn’t let you take more than 50 percent out in a refinance than the value of the property. The owners of the house can live in their home the rest of their lives with this sort of loan.

Reverse mortgages can be an affordable option for older people that allows them to have the lifestyle they want like the ability to travel or take care of their house.

Reminder on cash-out refinances
Although tempting, remember when you get a new mortgage you’re taking on more risk. You’re adding another monthly payment to your budget.

And, you’re going through the underwriting process with all the verifications and paperwork required that you did when you bought your home.

Bottom Line? Make sure that a cash-out refinance is the best financial choice for your situation — there may be other financing options available to accomplish your goals.

Things to consider when refinancing?

The first thing you must do when considering refinancing is to consider exactly how you will repay the loan.

If the home equity line of credit is to be used for home renovations in order to increase the value of the house, you may consider this increased revenue upon the sale of the house to be the way in which you will repay the loan.

The first thing you must do when considering refinancing is to consider exactly how you will repay the loan.

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On the other hand, if the credit is going to be used for something else, like a new car, education, or to pay down credit card debt, it is best to sit down and put to paper exactly how you will repay the loan.

Also, you will need to contact your bank and discuss the options available to you, as well as discussing with other lenders the options they would make available. It may be that there is not a current deal which can be met through refinancing that would benefit you at the moment.

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If that is the case, at least you now know exactly what you must do in order to let a refinancing opportunity best benefit you.

When refinancing, it can also benefit you to hire an attorney to decipher the meaning of some of the more complicated paperwork.

Is it smart to refinance a home to pay off debt?
By refinancing your mortgage to pay down debt or borrowing against your home, you could significantly reduce the interest rate on some of your other high-interest debt.

If you have credit card debt at 20 per cent, for example, you could reduce the interest rate way down if you can qualify for a mortgage at 4.25 per cent.

Can you refinance your loan even before it is paid off?

Yes, and this is yet another popular choice of refinancing. Getting a new home loan or mortgage to replace the original loan, or, transferring an existing loan to another lender is also another form of refinancing.

This form of refinancing is mostly done to help you get better interest rates and more convenient terms of repayment.

Refinancing your loan even before it is paid off is yet another popular choice of refinancing.

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In this case, the first loan is paid off, allowing the second loan to be created, instead of simply making a new mortgage and throwing out the original mortgage.

For borrowers with a perfect credit history, refinancing can be a good way to convert a variable loan rate to a fixed, and obtain a lower interest rate.

Borrowers with less than perfect, or even bad credit, or too much debt, refinancing can be risky.

- Refinancing when already under too much debt?

Often, as people work through their careers and continue to make more money they are able to pay all their bills on time and thus increase their credit score.

With this increase in credit comes the ability to procure loans at lower rates, and therefore many people refinance with their banks for this reason.

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Pre-purchase costs of a home purchase through mortgage can total up to 30 per cent of the property's value Image Credit: Shutterstock

A lower interest rate can have a profound effect on monthly payments, potentially saving you hundreds of dirhams a year.

Between possible high interest rates and an unstable economy, making mortgage payments may become tougher than you ever expected.

A lower interest rate can have a profound effect on monthly payments, potentially saving you hundreds of dirhams a year.

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Should you find yourself in this situation, it might be time to consider refinancing.

Without the right knowledge, however, it can actually hurt you to refinance, increasing your interest rate rather than lowering it.

When do you refinance your existing home loans or mortgage?
Homeowners can choose to refinance for a variety of reasons including:

• Cash out home equity: Homeowners can extract equity from the homes. If the equity is extracted to pay for home repairs or major home improvements the interest expense may be tax deductible.

• Change loan duration: Shorten duration to pay less interest over the life of the loan and own the home outright quicker; lengthen the duration to lower monthly payments.

• Lower rates: If home loan interest rates decline homeowners can refinance to lower their monthly loan payments.

Can NRIs avail this facility?

NRIs can refinance their debt-free properties in India. In fact, the process for availing a loan against a property does not vary a lot for an NRI and a resident of India.

As long as an NRI owns a residential or commercial property in his or her name, that person can easily borrow against his property.

The process for availing a loan against a property does not vary a lot for an NRI and a resident of India.

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But there are some restrictions to how much can be transferred, availed or borrowed, and also perquisites concerning minimum income requirement.

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Limits when borrowing against debt-free property in India

• Funds can only be derived from a maximum of two properties, which are subject to taxes. There is also a limitation on the amount that can be transferred, which is up to $250,000-a-person (Dh918,262) annually.

• The minimum one can borrow against any property in most cases, whether you are an NRI or not, is INR 500,000 (Dh 24,292), while the maximum is INR 50 million (Dh2.4 million).

The loan amount can go up to INR 100 million (Dh4.9 million), depending on your repayment capacity, and the city where the loan is disbursed.

Funds can only be derived from a maximum of two properties, which are subject to taxes.

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• Most lenders typically offer loans between 60-70 per cent of the market value of your property (loan-to-value ratio) and is available only in most cases to salaried NRIs.

While some lenders do avail 80 per cent LTV, there are others that provide only 40-50 per cent LTV of your residential property, which is subject to your income eligibility.

LTV ratio differs by type of property
LTV ratio is highest for loans taken against residential property, while LTV ratio is lowest for loan against commercial property.

LTV also depends on occupancy. According to data from Deal4loans.com, typically, the LTV ratio for a residential property that is self-occupied, is 65 per cent of its market value.

But if the property is vacant or rented, the LTV is lower at 55 per cent.

The tenure may be limited when compared to residents in India.

While some banks offer a maximum tenure of 15 years, some banks may not offer a loan against property for more than 7 years or 9 years. Only selected banks offer mortgage loan up to 20 years.

Most lenders also have a pre-requisite that defines the minimum income the borrower should have to be eligible for applying the loan.

This varies with countries. Some banks require the borrowing individual to have an income of Dh300,000 per annum for Middle East countries, and for USA and other countries: $80,000 per annum.

Tenure may be limited when compared to residents in India. Most lenders also have a pre-requisite that defines the minimum income of the borrower.

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Loan against property rate of interest are typically in the range of 8.7 per cent to 15.15 per cent per annum.

So first, check if the loan interest rates are lower in your country of residence, and if yes, then you may want to consider taking a loan there and then making use of the funds in India, like repaying or refinancing your debt.

Although if that is the case, you would also have to factor in the costs involved, like the exchange rate, processing costs and foreclosure costs, which we will go through in detail next when looking at risks to refinancing.

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Thinking of a mortgage loan? Image Credit: iStock

Risks to refinancing

Be it when it comes to borrowing against debt-free homes or refinancing loans before the loan’s term period ends, all forms of refinancing comes with its risk of additional fees or charges.

In most cases, banks charge a total of 1 per cent of the loan amount sanctioned or INR10,000 (Dh485), whichever is higher, as processing fee.

All forms of refinancing comes with its risk of additional fees or charges.

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Some lenders may charge 2 per cent as prepayment charge. And in case of late payment of the equated monthly instalment (EMI), you may have to pay a penal amount. Stamp duty is applicable as per state laws.

Some key risks of refinancing your home
One of the major risks of refinancing your home comes from possible penalties you may incur as a result of paying down your existing mortgage with your line of home equity credit.

In most home loan agreements there is a provision that allows the banks to charge you a fee for doing this, and these fees can amount go into the thousands.

Before finalizing the agreement for refinancing, make sure it covers the penalty and is still worthwhile.

Along these same lines, there are additional fees to be aware of before refinancing.

As an NRI, these costs may include paying for an attorney to ensure you are getting the most beneficial deal possible and handle paperwork you might not feel comfortable or not in a position to filling out, and bank fees.

Compared to the amount of money you may be getting from your new line of credit, but saving thousands in the long run is always worth considering.

To counteract or entirely avoid some bank fees, it is best to shop around or wait for low fee or free refinancing.

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The process of refinancing can also entail additional charges like home loan processing fee, which one must be taken into consideration especially when evaluating benefits of the transfer of loan from one to another.

In this case, once the documents are approved by the new institution, a cheque of the outstanding amount addressed to the new lender is issued in order to foreclose the loan.

Once payment is received, the existing institution will hand over the original documents.

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More banks in the UAE are offering deals on their existing mortgage loans, where they reduce the interest rate charged for a one-year period, passing on the recent cut in interest rates to the customers. The picture is used for illustrative purposes only. Image Credit: Supplied

Now that we have learn the different situations refinancing is used let’s now see, how one can go about it.

Checking your eligibility

Now coming to a key criteria, which is checking whether you are eligible. Most refinance facilities can be only be availed if certain conditions are met.

Firstly, what is asked by most banks is that minimum number of EMIs (or all if you are refinancing against a debt-free home) have already been paid by the customer. Secondly, the property is ready to occupy or already occupied.

Most refinance facilities can be only be availed if certain conditions are met.

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Next, you need to approach the bank or lending institution and get a no objection letter along with a foreclosure letter.

This is alongside a history of your home loan repayment and the list of your home loan related documents in the bank’s custody.

KYC procedure for NRI investors: Documents to have
When applying to a new lender, however, you would have to fill up a home loan application form and submit it along with proof of address and age, and photo for KYC (know-your-customer), proof of income and documents issued by the previous lender. The new lender will then review your credit history and sanction the loan.

To complete the KYC procedure for an NRI, a recent photograph, PAN card, identity and address proof, a certified copy of the passport, overseas and permanent address, and PIO card (for PIOs) need to be submitted. In case of NRIs in the Merchant Navy, a mariner's declaration or certified copy of Continuous Discharge Certificate must be submitted.