In this current economic condition, with the interest rates falling and downturn of the economy, it might seem like the perfect opportunity to refinance your home loan. However, refinancing a mortgage loan might not always be the right choice. Below are several factors that should be met if you are planning to refinance your mortgage loan.
1. Lower interest rates
It is possible to change from a floating interest rate loan package to a fixed rate loan package, or vice versa. A fixed rate loan package tends to offer a higher interest rate as the rates are more stable than the floating rate. This type of package will be more suited for those who want to be able to better budget their finances.
On the flip side, a floating interest rate loan package will update its interest rate regularly, be it one or three months. This type of loan package is the preferred choice by most when they expect a downfall in the market.
2. Lower monthly installments
A lower monthly installment would mean that you will have more cash flow. In an ideal situation, the lower interest will lower the monthly repayment amount, leading to better cash management overall.
3. Lock-in period is ending soon
Refinancing in the midst of the lock-in period will result in a penalty to be imposed on you. It is important to note down when the lock-in period will end so that you can give the financial institute a three to four months’ notice beforehand. It is not possible to refinance when the lock-in period is ending soon (i.e. one month left) as the paperwork needs some time to be processed. Be sure to start planning and get the approval to refinance early.
4. Increase home equity with a cash out refinance
In Singapore, private property owners can use their homes as a collateral to take up an equity loan. In most cases, the cash out amount is around 60 – 75% of the value of the property, after deducting the loan taken up for the home and CPF amount used to pay for it.
For those who are planning to do a cash out refinancing, it is recommended for you to take out the amount that you need, and not the maximum allowed amount. This will provide you a safety net in the event of a change in the value of the property.
It is important to understand why you want to refinance a mortgage loan, and not just blindly jump onto the refinancing bandwagon. Do remember to calculate the new monthly repayment amount and also look at the current interest rates.
Deciding whether to refinance or not is a major decision; if unclear about the differences between the refinancing options, be sure to consult a financial adviser.