Are you planning to refinance your home loan? Here’s a piece of advice: “Don’t do it without properly weighing its pros and cons”. Refinancing could be a good idea if done the right reasons, and it could also be a bad idea if done for the wrong reasons. Let’s take a look at what it entails so that you can decide the best course of action.
What do you get from refinancing?
Refinancing means taking a new loan to pay off your existing loan. But why take all the trouble just to replace one loan with another loan? The reason is that you get a new loan package that maybe has a lower interest rate, a shorter term, and more favourable conditions. In short, you will pay less in interests and have the opportunity to become debt-free faster. If you are doing it for these reasons, then refinancing is a good idea.
What are the pros of refinancing?
If you get a refinance package with substantially lower fees and a lower interest rate, then your total repayment will be lower. This means a much reduced monthly payment, which frees up more disposable income. If you are finding your big monthly payment burdensome, then trimming it down by refinancing provides a much welcome relief.
Replacing your 30-year term with a shorter term, say 15 years, helps you save a lot of money in interests. If your financial situation has improved since you bought your house and wish to become debt-free faster, then refinancing provides a way out without having to pay a prepayment (early payment) fine. Your monthly payment will increase, but your total payment will decrease significantly.
A home loan with a variable interest rate can make you scratch your head in bewilderment every time you pay your monthly instalment. If the interest rate keeps on rising, you will find yourself paying more and more every month. By the time you have paid the final instalment, you will have paid much more that you had initially calculated. Replacing a variable interest rate loan with a fixed interest loan protects you from rising interest rates.
One more reason to refinance a home loan is because it allows you to consolidate all your loans into a single loan. Let’s say that you have a credit card loan, a car loan, a home loan and a personal loan. All these loans have different interest rates and different payment dates. With so many different payments to make, it can seem impossible to keep track of all of them. Refinancing allows you to pay off all the different loans and get one neat loan package with a lower interest rate and shorter term.
What are the cons of refinancing?
Refinancing is not without its fair share of cons. It comes with all the different fees associated with getting a home loan: the valuation fee, loan legal fee and home owner’s insurance.
Now you know the pros and cons of refinancing home loans in Singapore, you can decide for yourself what is right for you. Do your math carefully, by taking everything into consideration and if the pros of refinancing outweigh the cons, then go ahead.