It is very well known that home is where the heart is, and home loan is where all our money is. Sometimes, home loans may make our heart sink and take away the feeling of comfort and security one usually should get at home. To reclaim that feeling again in our hearts, we start looking for refinancing options.
When the interest rate on a housing loan goes up, it goes without saying that we begin to refinance immediately. However, the ideal way to refinance is not immediately. We need to sit back, relax and think for a while. We need to ask ourselves a few questions:
- Will refinancing lower my monthly installment payments?
- Will I obtain lower interest rates if I refinance my home loan?
- Can the term of the housing loan be shortened or increased by a good few years?
- Are the costs that I will incur insignificant to the savings that I will enjoy for home loan refinancing?
- Can I obtain a cash-out equity loan on my private property if I want to?
The only way to immediately refinance our home loan is if the answer to all of the above questions is a big fat YES.
Understanding Our Priorities Before Making the Decision
The basic idea behind refinancing is to get lower interest rates and save money. Even a very minute difference in the rate of interest can make a difference of thousands of dollars. Thus, if the answer to any one or more of the above questions is no, then we should not jump to a refinancing option just because of a lower interest rate. We need to consider a few things before the big decision.
- We can increase or reduce the home loan tenor depending on our current financial situation, if there is not a very attractive refinancing offer with respect to the rate of interest. If we increase the tenor, we will end up paying a higher rate of interest but our monthly installments would go down. This option is good if we are going through a money crunch and need more time to repay the loan amount. It also lower your monthly liability and might help you navigate past TDSR.
Reducing the tenor would result in us paying more monthly, but for a shorter period of time and on a lesser interest rate. This might end up in us parting with a lot of money every month, but we will be able to bid goodbye to the loan sooner. All this analysis is, of course, of no use if we manage to score a very drastic reduction in the housing loan interest rate.
- If one is on a floating interest rate structure, then one, in a way becomes a slave of the fluctuating market. We might find ourselves constantly hoping for the market to either not fluctuate at all, or do so solely in our favor. This might be very exhausting mentally. Thus, to get rid of this mental turmoil, we can always opt for a fixed mortgage rate. After switching, we might feel that we should not have switched when the interest rates are low in the market but we need to remember that the interest rates are never constant. They might be low now but they will be high again. It is an unending cycle.
- We can harness the home equity in our private property by generating cash for other investments. Equity loan is not available for HDB flats. If we have good investments in the pipeline, taking up a loan against our property value can be a good move to maximize our personal financial returns. The simple logic is to use the funds from our home equity loan on investments that have a higher return than the interest rates that we will be paying for the home loan refinance. Equity loan is a cheap form of lending as its interest rates are lower than personal loans or business loans, and repayments are spread over the tenor.
Thus, by keeping these few points in mind, we can be more stable both financially and mentally.
Following Through On Your Refinancing Decision
A few quick steps to make the best home loan refinancing decision are:
- There should not be any pre-payment penalty charged from the existing bank for redeeming the housing loan.
- We must always compare the existing mortgage rates with those in the market.
- The use of a proper mortgage calculator is essential for an accurate analysis of the various interest rates.
- We should ideally already have a repayment schedule and an amortization table for the options we are considering.
- A proper analysis that include the costs of refinancing will give us the best option in terms of our savings, which can be a huge amount if we make an informed decision.
- We must compare as many refinancing offers as possible. For this, we should ask at least three different lenders and see what they have to offer.
- It is always better to ask for legal and valuation subsidies.
- We may ask a middle man, someone neutral for their opinion (example a mortgage broker) on the various available offers to get another perspective.
- We must ask the banks about all the charges as sometimes there can be hidden costs.
- Lastly, taking up the best offer, the one that suits our financial situation the most.
Thus, by spending time in analyzing our decision through these few steps, we can save a fortune while refinancing our home loan.
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