Joey Pilano, Negosentro | What is a refinancing? Why is the need to do so? And when is the right timing to take advantage of this so-called Mortgage Refinancing?
Refinancing is a process of terminating your existing loan obligation and replacing it with a new loan under different terms and repayment schemes.
Borrowers consider refinancing their existing home mortgage to somehow gain advantages. This includes the chance to haggle for lower interest rates, shorten the term of the loan, and change the rate terms from fixed for the entire term to variable rates or vice versa.
The right timing to do so depends on the borrower’s assessment if the mentioned advantages can hugely benefit him/her.
How to refinance your home mortgage?
Check your current credit score
Since home mortgage refinancing means applying for a new loan to pay off your existing loan, the process is most similar to the steps you went through when you first applied for a loan. Credit ratings on your credit score cards will again be one of the platforms on whether you will be approved for a refinanced loan.
Assess your own credit history. Ensure that there are no missed/delayed payments on your existing loan as this might affect your credit score. The same principle will apply that the higher your credit score, competitive low interest personal loans, and loan terms will likely be given to you.
Know your refinancing fees
Please take note that since you’ll repeat the whole loan process, processing fees will be collected. Home mortgage refinancing will require you to pay various processing fees, some listed below:
- Loan application fees
- Appraisal fees (the collateral will be re-appraised to update loanable amount)
- Title Verification and insurance fees
- Document processing fees
You have to identify the total processing fees you’ll undergo, add this to the new loan and compare this to the existing loan to assess if you’re on the advantageous side.
There are other banks who might offer “no processing fees required” to lure you into entering the refinancing. But this is not exactly what it meant in reality, you will still shoulder the upfront fees already inclusive of the charged interest rates.
For faster processing, have your paperwork available for submission anytime needed. In this millennial era, online/paperless transactions are common, which makes historical records harder to gather. The best thing to do is immediately download and print statements and other paperwork, file it in a neat folder, so that it may easily be accessible once required by the bank.
Lock your rate
One of the main reason why you refinance is to get savings through lower interest rates. If the economy is forecasted to hike interest rates, better secure yours for the entire term of the loan by opting fixed interest rate.
Have cash on hand
Be sure to have an available cash to temporarily fill the gap on the payment of processing fees meantime the refinanced loan is in the process. If no spare cash is available, you can go for personal loans.
When to refinance your home mortgage?
1. Securing a lower interest rate
Haggling for lower interest rate tops the possible reason for home loan refinancing. The benefit of having lower monthly loan payments or shortened term of the loan stems from the reduced interest rates.
2. You’re shortening the loan’s term
Once you succeed in reducing your interest rate, lower monthly amortization follows. You can now opt:
- Achieve lower monthly amortization on the same loan tenure
- Maintain your existing monthly amortization but on a shorter loan tenure
Achieving a lower monthly amortization does not greatly justify your objective of home mortgage refinancing since the longer you pay the loan, the likelihood of increasing your total interest expense at the end of the term can happen.
Since a portion of your monthly loan amortization will be free-up due to lower interest rate, you can now pay more on the principal, thus reducing the term of the loan.
Again, you have to make a sound decision in deciding the factors for refinancing. If you want to pay off the loan sooner, then a shorter loan term fits on you.
3. Converting Between Variable Rate and Fixed Rate Mortgages
Generally, fixed rates are higher than variable rates, especially on longer terms. This is due to the risks the bank will shoulder during interest rate fluctuations. Variable rates, on the other hand, are generally lower as the bank can easily adjust your interest rates to coincide with the economy’s movement and thus, lesser risks are involved.
It is in time for an upcoming economic crunch that fixed rate is in demand and variable rates works best during a falling interest rate situation.
Ideally, home mortgage refinancing has its advantages and disadvantages. What’s important is you weigh your decisions in your best interest. With a lot of research and analysis, you might find that refinancing might be a great financial move on achieving those discussed above.