If you have been in the property market, then you might have heard about home loan refinancing. In simple terms, home loan refinancing is replacing your existing mortgage with a new one. It is often presented as this sweeping move to save money on your mortgage, but that is not always the case. Home loan refinancing may not be the best option for everyone. That is why it is crucial to weigh the pros and cons of mortgage refinance, recognizing your financial situation.
Pros of Home Loan Refinancing:
1. Lower Interest Rate:
It is one of the top reasons people refinance. In the time between the purchase of your home to now, a lot of factors change, such as your financial status, the state of the property market, and the value of your home. And you can leverage this by home loan refinancing, which can help you secure a lower interest rate. A few hundred dollars saved up can be beneficial.
2. Lower Monthly Payments:
A lower interest rate on your mortgage also results in smaller monthly payments, always a perk if you are strapped in cash. However, if you opt for lower monthly payments, it will extend your loan period. The longer you take to pay up the loan, the higher accumulated interest you’ll have to pay.
3. Flexible Loan Period
Depending on your circumstances, mortgage refinance can lengthen or shorten the life of your mortgage. Refinancing doesn’t always imply lowering the interest rate. It can also be used to clear your loan faster. If you can afford a higher payment rate, you don’t have to be tied up to your debt for as long as the initial estimated time. You can cut it short, spend less on interest and be debt-free sooner.
4. Switch to a Fixed-rate Loan
Refinancing your home loan to a fixed interest loan can save you from the stress caused by the uncertainty of adjustable-rate mortgages. You’ll feel much more relaxed and secure knowing that your dues will be the same, regardless of the fluctuations in the market. Also, you will be able to budget more efficiently with the same principal and interest payments every month.
5. Tap into Your Home Equity
By refinancing your home loan as an alternative to a home equity loan, you can cash out a part of your home equity without selling your home. This is known as cash-out refinance. You’ll get access to a large sum of money-perfect if you want to start a business or pay for a child’s college education or other major purchases.
Cons of Home Loan Refinancing:
i. Closing Costs
Yes, refinancing your home loan will cost you an average of 2% to 5% of the loan amount in the form of closing costs. Closing costs include everything from loan setup fees to legal fees. Suffice to say, it can amount to several thousand dollars.
Certain lenders offer “no closing cost” refinance, but you’ll still end up paying these costs over time. The difference is that you’ll have to face a higher interest rate or pay higher monthly repayments throughout the loan period instead of paying in full at closing.
ii. Pay LMI
If you have home equity of less than 20%, then you might have to pay LMI charges. The Lender’s Mortgage Insurance may apply to your refinance loan even if you are refinancing with your current lender.
iii. Lower your Credit Score
Home loan refinancing is essentially applying for another home loan which means you are applying for more credit. Too much credit over a short period can lower your credit score.
iv. Higher Monthly Payments
If you refinance into a shorter-term mortgage as a way to pay off your mortgage sooner, your monthly repayments will be higher. This may not be a problem if you can afford it now, but you can never tell what your financial position will be like in the future.
v. Cost of Increasing your Term
Refinancing into a longer-term mortgage will give you more time to pay off the loan, and your monthly repayments will be lower. Although it is an expensive route in the long run because adding more time means you’ll be paying interest for longer.
vi. Time-consuming
Home loan refinancing can be a stressful process and take a lot of time. Its rewards aren’t fully realized until years have passed. Even then, the long-term savings on refinancing your home loan may be very little.
Is Refinancing Right for Me?
There is no clear-cut rule that is suitable for everyone when it comes to home loan refinancing. But if your credit score is satisfactory, you and/or your partner have a steady income, and you still have a considerable amount to pay off on your current mortgage, then home loan refinancing is definitely worth exploring.
If you’re still unsure, then it costs nothing to contact one of our Nepali mortgage brokers at Capkon and ask for advice to determine if refinancing is right for you. We’re here to help!
