Nov 19, 2021
How to refinance your mortgage?
If you own a home that you bought on a mortgage, it is very much possible that you will have to refinance mortgages of your properties at some point in time.
What is home loan refinancing?
Home refinancing means paying off your existing home loan by taking a new one with better features like a lower interest rate.
When you take the new loan, the old one is closed off, and you can start payments on the new mortgage. It is up to you to choose the lender.
When to refinance your home mortgage?
The timing when you decide to refinance your home loan matters a lot.
It would be best if you considered the following factors before refinancing your mortgage.
1. See if there's enough time left on your loan
Refinancing early during the mortgage (ideally in the first half) is a good idea, as most of your EMIs go towards interest payments.
If you can refinance and get a loan at a lower interest rate, you can save a lot of money.
2. Are you getting lower interest rates?
Interest payments constitute the most significant part of a home mortgage. So if you find a lender who can refinance your loan at a lower rate, say around 50 basis points or more, you should go for it.
This will lower the interest payments and lead to the shorter loan tenure, lower EMIs, and considerable long-term savings.
3. Check your credit score and income
Having a good credit score and a stable income further increases your chances of getting the best loan offers.
4. See if you are saving more than the costs incurred on refinancing
Refinancing doesn't come for free. You need to pay some cost.
If your projected savings from a refinanced loan are more than the costs incurred, you can consider refinancing your mortgage.
5. Are you getting better service?
Mortgage services play a crucial role in improving your experience.
If your old lender doesn't provide digital services such as digitized account management, on-tap customer service, etc., you should consider refinancing your mortgage.
How to refinance your mortgage?
There is no single way to refinance your mortgage. However, we are listing a few common ways you can do that.
1. Break your existing loan contract early
You should break your existing mortgage early and move on to a new one when you obtain a lower interest rate.
This means that you are terminating the current mortgage contract and taking on a new one.
Remember that this comes at a cost. First, you will be charged a prepayment penalty from your bank.
This differs from bank to bank, but usually, it equals around three months' worth of interest payments.
The lender, in this case, can be the same or even different. Therefore, you will need to approach each lender.
This is where you can avail the services of a mortgage broker to facilitate the application process.
They can also negotiate on interest rates with your lender and get you better deals.
If your loan gets approved, it is advised to read the terms and conditions, such as those related to costs, payments, and interest rates.
2. Add a home equity line of credit (HELOC)
A home equity line of credit works like a credit card account and gives you access to the equity in your home, at your discretion.
However, it is a secured loan where the interest rates are much lower. You can borrow against the equity in your home through a home-equity line of credit (HELOC).
Only those who hold at least 20% equity in their home are eligible for HELOC. There's a maximum credit limit of 65% of the home's market value.
When you choose to get a HELOC, there is no need to break your existing mortgage.
However, while you will save the money spent on prepayment penalties, the interest rates on HELOC will be slightly higher than those on mortgage refinance.
3. Blend and extend your current mortgage
Your existing lender might offer you a 'blended' mortgage rate for refinancing your loan.
This means you can extend your current mortgage term at a lower interest rate by blending the new interest rate with the old one.
In this case, you won't have to break the existing mortgage contract, and you can avoid paying prepayment penalty fees.
Refinancing your home mortgage is a big decision. You should take advice from experts or mortgage brokers and calculate all the costs before breaking your existing mortgage and moving to a new one. Mortgage brokers are well-equipped to guide you through the process.