Saving money and consolidating debts are some of the most common refinancing reasons
By: Hitesh Khan/
Saving money tops the list of most common refinancing reasons.
Saving money through refinancing can be achieved in two ways:
- By obtaining a lower interest rate that causes one’s monthly mortgage payment to be reduced
- By reducing the term of the loan, thus saving money over the life of the loan. For example, refinancing from a 25-year loan to a 15-year loan might result in higher monthly payments, but the total interest paid during the life of the loan can be reduced significantly.
Stability And Security & Consolidate Debt
Other common refinancing reasons are to convert their adjustable loan to a fixed loan, and to consolidate debts by replacing high-rate loans with a low-rate mortgage.
The main reason for doing this is to obtain the stability and the security of a fixed loan. Fixed loans are very popular when interest rates are low, whereas adjustable loans tend to be more popular when rates are higher. When rates are low, homeowners refinance to lock in low rates. When rates are high, homeowners prefer adjustable loans to obtain lower payments.
Another reason why homeowners refinance is to consolidate debts and replace high-rate loans with a low-rate mortgage. The loans being consolidated may include second mortgages, credit lines, student loans, credit cards, etc. In many cases, debt consolidation results in tax savings, since consumer loans are not tax deductible, while a mortgage loan is usually tax deductible.
Does Refinancing Add Up?
The answer to the question, “Should I refinance?” is a complex one, since every situation is different and no two homeowners are in the exact same situation. If you are refinancing to lower your monthly payments, the following calculation can be used as a general guide:
- Calculate the total cost of the refinance–example: $2,000
- Calculate the monthly savings–example: $100/month
- Divide the result in 1 by the result in 2–in this case 2000/100 = 20 months. This shows the break-even time period. If you plan to live in the home for longer than this period of time, it likely makes sense to refinance.
Balloon About To Pop?
Sometimes, you do not have time to consider the most common refinancing reasons as you may not have a choice – you are forced to refinance.
This happens when you have a loan with a balloon payment and no conversion option. In this case it is best to refinance a few months before the balloon payment is due. Whatever your reason for refinancing, consulting with a seasoned mortgage professional can save you time and money.
Today, consumers have a wide range of home loan packages to choose from compared to 10 years ago. For example, the fixed deposit pegged home loan introduced by DBS in 2014.
Home loans could also be tied up with programmes offered by banks such as the DBS Multiplier, which rewards customers with a higher interest rate on their deposits if they transact more with the bank, such as getting a home loan and crediting your salary to the bank. Do consider the offerings in the market.
Can a new loan offer you savings? Typically, a home loan package offers attractive rates for the first three years, following which the interest rates are adjusted upwards, which usually coincides with the end of the lock in period, offering borrowers a good opportunity to relook their loan.
In considering some of these common refinancing reasons, you should also not ignore the personal factors. Factors like:
- Refinancing a home loan would mean reassessing your credit standing.
- Has your salary increased/decreased since the last assessment?
- Have you taken up more loans?
- Have you been paying your bills on time?
These factors will affect your credit score and willingness of the bank to refinance your loan.
Banks can come up with customised solutions to meet your needs whether it is to change the loan tenure or lower your monthly payments. Find the bank that offers you the best solutions. However, do note that generally if you stretch your loan tenure over a longer period, the interest payable at end of loan is higher.
Refinancing a home loan can offer you an opportunity to unlock cash from property. This alone would trump all refinancing reasons for most home owners seeking new mortgage loans.
How to Secure a Home Loan Quickly
Do you want the best home loans but are unsure if you can get one? Don’t worry because trusted mortgage brokers can set you up on a path that can get you a home loan in a quick and seamless manner.
Alternatively you can read more about the Best Home Loans in Singapore before deciding. Good mortgage brokers have close links with the best lenders in town and can help you compare Singapore home loans and settle for a package that best suits your home purchase needs.
Whether you are looking for a new home loan or to refinance, best mortgage brokers can help you get everything right from calculating mortgage repayment, comparing interest rates all through to securing the loan. And the good thing is that all their services are free of charge. So it’s all worth it to secure a loan through them.