House refinancing or re-mortgaging simply means switching your existing mortgage for a new and better deal, often to a new mortgage lender or bank. There are a few reasons refinancing may seem like a good deal to house owners. Among them are:
1. To Free Up Some Cash
Refinancing can free up some cash for the house owner, which is beneficial especially when you are in need of extra money badly. This is made possible only if the current market value of the house exceeds the amount which you owe the bank.
For example, say the house which you bought three years ago is now valued at RM250,000 and the outstanding loan balance is RM190,000. If you decide to refinance the house, you could have roughly RM50,000 extra cash, after deducting legal and redemption fees.
However, you should think carefully before you trade-off the equity with money. If you intend to spend the money on an exotic holiday or buying your dream car, you will actually be paying interest on it for the rest or the mortgage term.
2. To Consolidate Debts
The money, which is freed up from the house equity, is often used to consolidate debts. It is used to clear all outstanding balances on credit cards, personal loans and even overdrafts.
As a result, you may be left with only one payment each month – the re-mortgage, which makes it easier to manage. Nonetheless, if the various debts which you have are small and you can manage the repayments, you may be better off keeping them separate and clearing them quickly.
3. To Secure A Lower Interest Rate
This is perhaps the most strategic financial reason to refinance the house. With the financiers competing for a slice of the market share, consumers are spoilt for choice thanks to the lower interest rates offered when compared with the normal house-loan package.
Despite the attractiveness of home refinancing, there are some reasons why refinancing your house is not good option especially if the following conditions prevail:
1. You Have Been Paying An Existing Loan for a Long Time
If you are already ten to twenty years into a thirty-year mortgage for instance, refinancing another thirty-year loan may only increase your costs in the long run, which makes it undesirable for you to refinance the house.
2. Your Credit Report is Worse Than the Last Time You Secured a Mortgage
It is more likely that you have missed payments or run up big credit-card bills which may have registered an unfavorable credit report. If you ever had such an experience, you may not qualify for a low rate for refinancing to make sense. It is best to check out how you fare on the credit report before you make any attempt to refinance.
3. You Have Serious Spending Problems
If your sole purpose of refinancing is to pay off credit-card debts, then you should think twice of its potential consequences. In fact, you have turned what should be short-term debt into long-term debt which can cost you more in the long run.
Apart from weighing the pros and cons listed above, you should also assess whether it is financially worthwhile to re-mortgage or not. Here are some basic steps on how to go about it:
Find Out the Details of the Current Mortgage
The first thing you should do is to get the latest information on your current mortgage. The information should include the amount still owed and the penalties charged should you want to pay off the loan.
It is advisable to inform the bank about your intention to refinance. The bank might be able to offer you stay with them, an alternative worth considering if the offer is as good as the ones the other banks are offering.
Shop Around for a New Mortgage
There are many banks out there which offer refinance packages. To help you decide which one offers the best, here are a few factors you should consider:
- What is the interest rate if you borrow for fifteen, twenty or thirty years?
- What is the interest rate for the first, second and subsequent years?
- What is the minimum and maximum amount of the loan?
- Does the mortgage come in the form of term loan, overdraft or a combination of both?
The steps mentioned above are only part of the preliminary work that you have to do before deciding to refinance your house. Thus, it is wise to read and ask about how the refinancing process works. More importantly, get a copy of your credit report so it will come in handy when you finally decide to refinance.
