Refinancing your Home Loan: is Now the Right Time?

by : Alan Lim

What does it really mean when you refinance your home loan? Why would you want to refinance? Well, there are quite a number of reasons why home owners resort to refinancing. Unfortunately, knowing whether to refinancing a home loan is a sound financial decision or not remains a difficult crossroads to take.

Refinancing simply means applying for a new mortgage to get some extra money to seal in all your other debts. It can be financially favorable as there are a number of mortgage loans that are given at better interest rates. If you get a better deal, you may be able to pay off your loan much sooner and would have to pay back a much lower amount. However, refinancing may also work the other way around and you may end up paying higher than your initial mortgage. Because of this, you should carefully choose the right time to refinance,

Before making a decision to refinance, consider the following factors:

What are the terms of your existing mortgage? If you are already on the 20th year of your 30-year mortgage, you will only add on to your financial burden if you decide to refinance. You will have to extend for a few more years and this may not be worth it.

What is the interest rate you will get if you refinance your home loan? If it is at least 2% lower with reasonable points, refinancing may be favorable. You can easily know the going interest rate in your mortgage paperwork, or you can consult your lender about this before making your final decision.

How much monthly payment do you need to pay with a new home loan? Mortgage refinancing may lower the monthly payment you need to pay. This proves to be a great opportunity to get some extra savings. However, this is usually at the expense of extending your home loan back to its original tenure. Consider though that you can use the extra savings you have to pay off your principal little by little, so it might not be such a bad idea after all.

When deciding whether you should refinance your loan or not, you can simply take a look at your current interest rate, monthly payments and the remaining period that you have to pay for your mortgage. Compare all these to the monthly payments as well as the required payoff if you get a new home loan. If you think that the benefits of refinancing definitely outweigh the process cost, then refinancing should be right for you.

You can also easily evaluate whether a new home loan makes sense financially (quantitatively) at this time by listing down all the current monthly payment you need to pay, the amount that is left on your loan, along with the total payments you still need to pay for. Do the math and compare this to how much you are bound to pay monthly and for the whole mortgage if you refinance your home loan. Consider fees and escrow costs in the latter as well.