Refinancing your home is an ideal way to lessen a mortgage's burden. Doing so leads to lower interest rates, which means saving money. That said, refinancing is worth it, especially when you've passed the lock-in period.
One of the most expensive investments for most is their property. In fact, a housing loan is a common source of debt for some, and a mortgage loan lasts between 20 to 30 years. This requires commitment from the borrower to make monthly repayments which vary in amount.
Payments range from hundreds to thousands of dollars. Those on tight budgets should consider looking for better options, such as refinancing their homes. In case you need to finance your home, keep reading this article.
Home loan refinancing lowers your monthly repayment amount by switching to a different loan plan that offers a lower interest rate. This also means switching banks altogether. Homeowners can save money in the long run by going for a less financially demanding housing loan package.
Typically, refinancing is done on a time schedule when the interest rates are most likely to increase. Homeowners like you may find it ideal to opt for a refinancing home loan when interest rates fluctuate regularly, such as due to global economic improvements or crises.
That said, predictions on these interest rates regarding home loans are made, and if part of these say that the rates are about to go up, it's most likely a good time to switch to better home loan packages.
To gain better insight and make a more informed decision based on these things, check the Association of Banks Singapore (ABS) and the Monetary Authority of Singapore (MAS) . These keep track of the SIBOR and SOR rates and apply the interbank lending rate changes daily.
Home loan refinancing works the same way with your existing loan application process. The lender will check your eligibility for the loan you're applying for and assess your finances and the risks implied from this aspect.
Expect different terms when you refinance. You can switch from having a 30-year term to a 15-year loan tenure. Another option is to go from an adjustable rate to a fixed rate. Most homeowners go for the lowest mortgage interest rates agreement among all the terms.
An example of home loan refinance is when you reset the current loan tenure.
If you have a 20-year loan term and have already paid 5 years off the loan amount, that leaves you 15 more years to pay.
Yet, if you refinance a new 20-year loan, the remaining loan amount is recalculated and you’ll have lower monthly repayment amounts.
That said, you'll have 20 years to repay the principal amount plus the interest rate.
On the other hand, if you refinance to a new 10-year loan package, you'll pay five years earlier off your loan amount.
Below is a sample table simplifying how home loan refinance works when its loan tenure has been reset:
| $700,000 Mortgage Loan | |||
| Current Loan (20 Years to Pay) | Refinance (20 Years to Pay) | Refinance (10 Years to Pay) | |
| Years Paid | 5 Years | 5 Years | |
| Interest Paid | $43,519 | $43,519 | |
| Remaining Loan Balance | $481,480 | $481,480 | |
| Interest Rate | 2.30% | 1.6% | 1.4% |
| Monthly Installment | $3,642 | $2,346 | $4,302 |
| Total Interest Rate Payable | $173,959 | $81,457 | $34,770 |
| Potential Savings | $48,953 | $95,670 | |
| Total Legal Costs Incurred | $3,000 | $3,000 | |
| Net Savings | $45,953 | $92,670 | |
Note: DBS MyHome planning tools’ calculations are used to come up with these figures.
While refinancing does sound good, it's more challenging than it seems. Yet again, it's possible to be done too. Assessing your situation and how the economic future looks is crucial so you'd know when refinancing should occur.
Below lists five helpful tips to guide you into mortgage refinancing:
1. Refinance after 4 years or beyond – Your existing bank may have 2 to 3 years lock-in periods. You must take note of the dates when the interest rate will spike and execute a financial strategy so you won't have to be affected by the changes. Also, before you refinance in the fourth year, a 3-month notice for your current bank is required.
2. Weigh the pros and cons of refinancing – Refinancing comes with legal fees ranging from $2,500 to $3,000. You must set these legal fees against the amount you're expected to save should you refinance. It's all about the reasons that drive homeowners to refinance. If you want to allocate more budget for the food, gas, and electricity, refinancing will allow more cash to flow for these areas.
3. Consider your debt-to-income ratio – Financial institutions assess your capability to pay them back. Not because you qualified before, you'd qualify again for the next. They'll thoroughly check your financial status and the risks that come with it. If you have a lot of money owed, it makes sense to pay it on top of having a high credit score before you consider refinancing.
4. See if your bank offers free repricing – Repricing means switching to a new loan package with the same bank in contrast to refinancing, which makes you switch to a new bank. Free repricing allows you more savings as this grants you no legal costs compared to what is required in the refinancing process.
5. Focus on long-term rates – Banks are known to offer homeowners enticing rates only in effect in their first three years or so. If you're seriously up to saving cash, calculate how much you'd be required to pay based on the long-term rates versus the teaser rates, which may increase after a certain period.
Aside from these five tips, you should also avoid refinancing during the lock-in period since this comes with a penalty fee. Use the mortgage broker, mortgage specialists, or home loan specialists hired by the bank. They can help in reviewing your existing home loan.
To add, qualifying for refinancing can be made easier if your home equity is at least 20%. Knowing this comes with a valuation fee.
Lastly, home loans are capped at 35 years. If you have paid off 20 years of your loan and refinance it, the maximum new loan tenure is 15 years. This can be reduced further if you're approaching your retirement age of 65.
Refinancing is an excellent way to positively change the direction of your finances. Since home loans mean serious money over time, it’s best to take note of the tips listed in this article to potentially avoid premature refinancing or legal costs to refinance.
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