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6 Things You Should Take Note of When Refinancing Your Home

Singapore Personal Finance

by CashOctopus • September 6, 2019

Refinancing your home refers to the process of replacing the original mortgage with a new one. Refinancing serves the purpose of enabling borrowers to more favorable interest terms and rates. Paying off the first loan makes it possible to create a second loan rather than getting rid of the initial mortgage and obtaining a new one.

Borrowers who have a good credit history can consider refinancing as an effective way to change variable rates to fixed rates while enjoying reduced interest rates. Refinancing is likely to be more challenging for borrowers who have less than average or bad credit.

Under most economic circumstances, it can be hard to make home mortgage payments. Fulfilling mortgage payments is often difficult when dealing with situations such as unstable economies and high interest rates.

The key factor that causes refinancing to be risky is lack of knowledge. Without being equipped with the right knowledge, people will not be able to reap the benefits of refinancing and can actually end up increasing their interest rates instead of lowering them. Basic awareness regarding the aspects of refinancing is essential to help you identify the best deals.

Several homeowners have considered refinancing their homes. Property refinancing can be undertaken for various reasons, which usually leads to more manageable costs for people who plan to stay in the home for many more years. The following are among the things that are considered when people choose to refinance mortgages:


1. Reducing interest rates

Obtaining a lower interest rate is often regarded as the main reason for property refinancing. Lower rates make it possible for borrowers to take advantage of smaller payments and therefore increase their disposable income.


2. Changing to fixed rates

With low interest rates, switching to fixed rates from variable or adjustable ones is an appealing prospect for many homeowners. Even if the interest may be slightly higher in comparison to a variable loan rate, the predictable nature of fixed payments is often preferred. Fixed rates are stable, unlike other unpredictable life expenses.


3. Resetting variable mortgage rates

Variable mortgage rates remain the same for a fixed period of time. After this period, the rate is reset and may be reset on annual basis afterwards. Homeowners may opt to refinance their homes before the adjustable rate is reset if they anticipate higher interest rates. A different variable mortgage rate or a fixed rate would be more stable than rates that change every year.


4. Withdrawing equity

Building up equity in homes may lead to refinancing in order to be able to withdraw the cash and use it to facilitate a large purchase like remodeling or home repairs. Refinancing a home to access cash for major purchases may be more affordable than using credit cards.


5. Consolidating mortgages

Some people have two loans and making the payments can be complicated. Home refinancing provides a way to combine the loans into one mortgage and enjoy the benefits of substantial savings on interest.


6. Including and removing names

If a situation arises that makes it necessary to change names on the mortgage, the next step is to refinance. Refinancing sets up a new mortgage and ensures that the right names are on it. When a borrower’s finances have improved, a co-signer can be released from the mortgage through refinancing.


Advantages of refinancing your home

Refinancing facilitates a new mortgage with the aim of changing mortgage companies, taking money out of homes for major purchases, lowering interest rates or reducing monthly payments. Many people choose to refinance when there is equity on their homes. This is the difference between what is owed to a mortgage company and the value of the property.

  • One of the key benefits of refinancing, whether or not equity is being considered, is the lower interest rate. Usually, when people work and continue to earn more money, they have the ability to boost their credit score by paying bills on time.
  • A credit increase comes along with the ability to obtain loans at reduced rates. This is why many individuals opt to refinance with mortgage companies. Lower interest rates can have a significant impact on monthly payments and enable people to save a lot of money annually.
  • Another advantage of refinancing is the fact that it enables people to get the money they need for larger purchases like vehicles to lower credit card debt. This is achieved by taking equity out of properties.
  • For people who have loans that are too risky or costly to live with, refinancing is an option to help them get loans with better terms. Since things may have changed since the money was borrowed and there may be numerous ways to improve the terms of the loan. With home loans, refinancing makes it possible to move debts to better places.


Common mistakes made when refinancing homes

Homeowners have the opportunity to save a lot of money when they refinance their mortgages, especially when the interest rates are low. However, the process is not as easy as just identifying good interest rates and taking the plunge. There are various considerations that need to be taken into account. These are some of the common mistakes that homeowners make when refinancing their property:


Not comparing different lenders

  • It is interesting to observe how frequently borrowers go directly to their usual banks when they want to refinance or when they need a home loan. Some borrowers look at a few rates that have been advertised and choose the lender that offers the lowest rate. There are also a number of borrowers who believe that they are limited to financing with a current lender.
  • It is advisable to look at the competition whenever someone seeks to refinance a mortgage. Even what appears to be a small difference in percentage points on rates can help you save a lot of money over the lifespan of a loan.
  • Several factors affect the cost, which can make the pricing of mortgages complex. This is why it is essential to carefully go through the fees, terms and rates that are offered by various lenders. Homeowners are encouraged to set aside enough time to find the best deals.


Focusing on mortgage rates

Borrowers often make the mistake of basing their decisions primarily on the interest rate while making comparisons between lenders. Since multiple factors affect the pricing of mortgages, lower refinancing rates can end up costing more than higher rates that are being offered by another lender.

Closing costs vary among lenders and lower rates can be used to cover up loans that come with extremely high fees. Inquiries should always be made regarding things such as fees and credit reports prior to applying for loans.


Insufficient savings

It will take a long period of time to recoup the closing costs if the interest rate is minimally reduced. Not saving enough each month means that it will take several more years for someone to break even. Refinancing is worthwhile when a significant chunk is knocked off the current rate. Smaller reductions can be justified for higher-end homes due to greater savings and when people plan to stay in their homes for a long time.


Monitoring mortgage rates

Borrowers may monitor refinancing rates when the interest rates are low with the aim of jumping in when rates are as low as possible. However, they usually end up missing the opportunities and rates go up again. Even the most experienced professionals can find it difficult to track mortgage interest rates.


Refinancing frequently

When interest rates are low, people who have refinanced their loans tend to do it again and take advantage of the low interest rates. This can be detrimental when people are not careful. The reality is that refinancing requires money and in order for the process to be sensible, enough interest needs to be saved to cater for closing costs.