When we own a property and we have a mortgage on that property, refinancing is closing that mortgage and opening a new one. So, when we refer to refinancing a home loan in Singapore, we are actually breaching the old mortgage or contract and we’re pulling up the equity from the house and starting a new mortgage. When you say that you are breaching or breaking the old mortgage, you would mean that you will be discharging the liabilities associated with that mortgage and registering a newer one.
Now, the question is when is a good time to refinance. Well anytime is a good time to refinance but there are certain ways or better times to refinance. Such times include:
- When the mortgage is up for a renewal – this is the best time for the client to refinance, because if the client had signed the contract with a lock-in period of five years with the bank and he or she still has four more years on that that loan, the client will end up paying the penalty.
- You should go for refinancing if you can save money by getting a lower interest rate from the new mortgage. It is worthwhile to refinance, if the new rate is at least 1% point below than your current interest rate. You can save a lot on a 30-year loan of $100,000. Moving from 3.5% to 2.5% can save you more than $80 on monthly basis. So, you’ll need to compare your current rates to the rates offered by lenders in the Singapore financial market.
- There will be other closing costs such as valuation cost and legal. All in all you could expect closing costs to range from $2,000 to $2,500 before any subsidy; so, how do you figure out it’s worth it for you? Generally the bottom line refinancing approach is used. For example, if your refinance costs is $3,000 and you are saving $150 per month because of your lower payments then you will be able to get a break even in 20 months after refinancing. You should do your cost benefit analysis. If lower interest rate can weigh beyond these additional costs then you should go for refinancing.
- Refinancing simply means that you’re swapping out of one loan and everything that went with it. Weigh features of each loan and even the lender if you want to go for an entirely new mortgage loan. In fact, you paid off your current mortgage with the money you borrowed from your new mortgage, you’ll need to assure the new lender that you qualify for the new loans which means a new application and closing process. You should go for refinancing when you are sure about handling all that trouble once again.
- Another good reason to refinance is to change the type of mortgage. You may have witnessed a lot of homeowners who have floating mortgages rates and their current rate switching to fixed mortgages rates. Floating rates could rise in the future and they could go much higher. Refinancing now with today’s low fixed rates will end the uncertainty of what the floating rate loan could do in the future.