Guide to Refinancing

Want to Know more about Refinancing?

Refinancing is getting a new mortgage to replace the old one. It is usually practiced by borrower to get a better interest rate.  In this post, we will talk about why and how refinancing works. In this unstable economic state nowadays, it can be difficult for some people to pay the home mortgage on time. When this happens, refinancing can be an option for them. However, it is important to understand it well before doing it as it could actually cost you more than save if you do it wrongly.

There are also other common reasons why homeowners or investors refinance their properties.
The most common forms of debt are home mortgages, car loans and student loans. The borrower agrees to make certain payments based on a rate of interest when they obtain the loans. Terms provide the details of the loan and specify the interest rate, payment amount and payment date(s).

 A common goal is to pay less interest over the life of the loan. Some of the mortgage taken long time ago was more expensive back then (around 8%) , so refinancing with the interest rate nowadays (4-5%) can actually save you up to thousands! 

• The chance to shorten your mortgage loan tenure ( if you choose not to cash out)
• The opportunity to get another cheap property with the cashed out money from refinancing.
• Pay for emergencies ( debts, medical fees for operations and more)
• The desire to convert to a different mortgage product type that they feel can suit them better.

Shortened Mortgage Tenure

By refinancing, you may opt for cash out or shorten your mortgage tenure. For example, you may have 23 years of mortgage left by paying RM800 every month. After refinancing, you may choose to continue pay RM800 every month, but the tenure is now shortened to 20years, which are really huge amount if you calculate that up, plus you will be debt-free 3years earlier by doing basically nothing but just refinancing with the banks.

Cash Out to buy another new property or investments.

 Though it sounds exciting cashing out from your property that has appreciated by 50%, do note that the cash out should be spent on assets, which will generate further income or appreciation.

If you are a seasoned investor and you know what to do with the extra money, cashing out is really a good choice as you can invests it on something else with higher returns or get another property with high appreciation. Be careful with the possible risk of losing that money on bad investments though. 

There are also homeowners who refinance with the purpose of child education, wedding funds, overseas trips, purchasing expensive goods such as furniture, fixtures, cars and so on.

Debt Consolidation

A mortgage loan is cheaper compared to interest rates offered by personal loans or credit card loans. 

Refinancing our mortgage loan to pay off the personal loans could potentially saves a large sum of money in terms of the interest rates. 

For example, if you have a credit card loan that charges you 15 to 18% interests ( which are probably highest among other possible loans ) , pay it off with the mortgage loans as they usually charges you much lesser interest rates ( usually around 5%)  

One thing to take note though, try not to have bad records with paying credit card loans as it will affect your approval rate for mortgage loans. 

Refinance or not?

Refinancing is actually pretty straightforward. If other bank offers you lower interest rates for the same amount of loan you get, by refinancing , you could save up to thousands. Cashing out or shortening the loan tenure is definitely helpful if you know what to do with the extra sum of money.

If you are renting this property out, you may be able to improve your rental cash flow position from a potentially negative to positive cash flow since the monthly installment is lower now.

Do correct me if there are any mistakes. Happy learning and investing together!

W.