The real estate properties of residential properties in Singapore have been rising in favorable levels in the past several years. According to the Urban Redevelopment Authority, residential property price index has maintained an increase that ranges from 3% to as much as 6% in the previous year. Moreover, interest rates in Singapore have slowly become more and more favorable. In fact, many homeowners in the recent years have taken advantage of the lower interest rates and have sought refuge through refinancing home loans.
What is home loan refinancing and should you also jump into the bandwagon? Home loan refinancing is simply taking on another loan in order to pay off an existing loan or getting cash out of your home equity. If you loaned money from a lender in order to secure your home, you can actually get a second one (from the same or another lender) to pay off the previous one.
Refinancing offers a range of options for homeowners. Many homeowners, for example, wish to refinance their loans in order to avoid risks of increasing interest rates with their existing adjustable rate mortgage. Getting a second mortgage will allow you to take on a different type of home loan. Depending on the current market, your existing loan and your financial condition, you can choose from a wide range of mortgage loan types and programs.
Refinancing can get you out of financial trouble, but it is not always a guarantee that such will happen to you. The rule of thumb that is traditionally followed for refinancing is that: if the interest rate you pay for can be lowered by at least 2 percentage points (such as from 6% to 4%), refinancing is a good option. Of course, this only follows if you intend to stay in your home for the next few years. Needless to say, you must feel at ease with the amount of repayments you need to fulfil and the duration at which these payments have to be done. If you have a SGD300,000 30-year mortgage with an 8% interest rate, you usually have to pay SGD1,500 per month. However, if you get a second mortgage at a 6% interest rate, you will only pay about SGD1,200 which translates to SGD300 worth of savings per month.
Note though that refinancing home loans will incur certain fees such as closing costs. They are usually hefty and can cost several thousands of dollars. For refinancing to be worth your while, you must aim to break even at the soonest time possible. For instance, if closing costs are at SGD3,000, you will expect to break even after 10 months if you save SGD300 each month. If you intend to stay in the property at least in the next 12 months, then refinancing still would make sense. But if you should decide to sell it before the break-even point, then refinancing is not entirely a good idea.
Note also that the decision to refinance should not only be based on lowering interest rates. In fact, all refinancing home loans and programs are different. There are other factors that should affect the attractiveness of refinancing. Consider, for instance:
1. The duration of the mortgage - how much time is needed to pay off the principal and the interest? Short-term mortgages usually come with lower interest rates but involve higher repayments - but they actually cost you lower over time.
2. The type of mortgage you choose - Although fixed interest rates offer the least risk and provides leverage should interest rates rise, variable rates can offer better savings if interest rates lower in the next few years. If you intend to stay in your home for a while, the predictability of fixed mortgages may offer you better stability.
3. The fees you need to close the deal - As mentioned earlier, you also need to consider fees that will be passed on to you as these are typical of refinancing home loans. Some lenders offer low to zero closing costs but charge you higher interest rates instead. Compare rates as well as closing fees to determine whether refinancing can be justified.