Home loan or mortgage refinancing is the act of replacing an existing home loan with a new loan (can be with a different bank) under differing terms and conditions. In another words, it is like borrowing money again to pay off the existing mortgage. It is mainly to take advantage of the latest home loan or mortgage refinance packages currently available in the market to:
- reduce the total bank interest charged;
- reduce monthly payment;
- reduce or extend the mortgage tenure; and/or
- cash out the home equity (appreciated value) for other usage (e.g. investment, emergency use, etc.)
For example, said comparing to an existing home loan with fixed interest rate of 6.6% per annum, switching to a latest home loan refinance package may offer an interest rate at 4.4%. This means by switching to the latest package, it is able to reduce the annual interest rate by 2.2% for the rest of the loan period.
In addition, refinancing enables borrower to adjust the loan period depending on needs. If one has monthly cash flow issues, taking up a refinancing plan with a longer loan period allows the person to pay less in monthly installment, hence freeing up a greater part of the monthly income for personal use. This comes in very handy especially when one has a sudden increase in commitment, such as buying a new car or paying for a child entering tertiary education.
On the other hand, if one is becoming now more financially stable compared to when he/she first took the home loan, and is considering to reduce the loan period (e.g. from 30 years to 15 years) in order to save on the interest cost; home loan refinancing is a feasible option to be considered, especially if one is currently stuck on home loan package without flexible pre-payment options.
Despite with all the potential advantages from the home loan or mortgage refinancing, one should check with the bank to assess the potential 'hidden cost' of switching to a new home loan or mortgage package, as penalty for early settlement of the existing loan package that is still within the lock-in period.
Check out the Mortgage Calculator to evaluate the potential interest cost over the mortgage tenure.
