Your home loan repayment probably takes up a chunk of your monthly expenses. Being one of your major investments, it’s only fitting that you grab any chance that you can to reduce the costs or take out any possible benefits from it. These two reasons are what make people consider refinancing their home loans.
What is home loan refinancing?
Basically, refinancing your home loan means that you will take out a second loan to pay for the first one. After that, the first loan no longer exists and you start paying for the second one.
While this might sound complicated at first, there are practical reasons people choose to go for it.
What are the benefits of home loan refinancing?
Lower interest rate
You might have bought your house at a time when the interest rates were high. If the housing market allows for a lower interest rate right now, then the smart thing to do is to pay off the higher interest rate loan completely and get one with a lower interest rate.
If you have a fixed-rate mortgage loan, that means that you will be paying the same interest rate until the loan is completely repaid. Say, for example, that is 5% per year for 30 years.
Say it’s your fifth year now and you decide to take out a 25-year mortgage for refinancing for a 4.5% interest rate, then you will ultimately have savings.
The 0.5% difference in interest rate might seem small. However, if your loan is $700,000, the 0.5% difference will make you $3500 monthly. Multiply those monthly savings to the remaining 25 years, that is $87,500 in total.
Adjusted payment terms
Aside from lower interest rates, some people consider refinancing to enjoy better payment terms. A second mortgage could be paid fortnightly instead of monthly. You can pick this option if you are looking to pay off your mortgage sooner.
You could also opt for a shorter mortgage term. From a 30-year mortgage, you can get a 15-year one. Although this means an increase in the monthly payment, shorter loan terms mean the lower you pay in interest.
When you have already spent a few years paying off your mortgage, that means that you have already built up your home’s equity. To put it simply, your home appreciates in value over time, and equity comes from this. The more you pay down your loan, the bigger the equity built.
You can use that equity and convert it to cash through what we call cash-out refinancing through a second mortgage. The second mortgage will pay the remaining amount you owe in your first one and you get cash based on your home equity..
You can use this money however you want. Maybe a trip, a home renovation, or for…
Consolidation of debts
A cash-out refinance is also a great way to consolidate high-interest debts. If you owe money because of credit card purchases, medical bills, or personal loans, the chances are paying back a high interest for them.
High-interest loans are usually under the category of unsecured debt, meaning there is no collateral. The absence of collateral is the reason for the high-interest rates.
When you compare the two, unsecured debts charge you around 10% to as high as 25% while a mortgage interest rate is usually around 4% on average.
When is the right time to apply for a home loan refinancing?
With the provided examples above, it is clearly implied that timing is of great importance when considering refinancing. If you think you will be better off getting a new loan because of any of the reasons above, then do so.
However, you should also consider your future plans when getting a second mortgage. IT might not be worth it if you plan to leave the property and move to another place in the next two years or so.
What documents do you need for home loan refinancing?
A credit report is what the new lender will look at when you apply for a second mortgage. Because this is just another loan, the same documents you submitted when you took out your first loan will be needed. Prepare your asset portfolio, insurance documents, and proof of income among others.
Your home will also be appraised for its current value.
Is refinancing for you? Talk to a mortgage broker to know the step-by-step process.
It is not easy to decide on whether or not you should get a second loan. It’s also a case-to-case basis, but what can help you arrive at a sound decision is talking to an expert.
Schedule a consultation with our expert mortgage brokers so you can make an informed decision.
First, our broker will assess your situation: how much equity you have, your reason for thinking of getting a refinance, and your future plans.
Our broker will inform you about all the costs such as exit fees and application fees that you will need to shoulder when you take out a second loan. You should take this into consideration to weigh if a refinance is worth it.
Our brokers are knowledgeable on the current loan products and features available to you. We will walk you through all the comparisons so you can choose the best option.
When you decide to greenlight the refinance, we will help you prepare all the documents needed for the application.