9 Things You Need To Know About Refinancing Mortgage Loans

By iMoney / iMoney.sg | November 14, 2018 4:46 PM SGT
What is home loan refinancing?
If you’re a homeowner, you may have heard of home loan refinancing – but do you know what exactly it is? Home loan refinancing refers to the process of swapping out loans, and moving your debt to a different loan with a lower interest rate.
Homeowners generally consider refinancing when they wish to take advantage of:
  • lower interest rates
  • a shorter loan tenure
  • the option to use home equity (the difference between the market value of the property and the outstanding mortgage balance) to cover large expenditures
Here’s how refinancing works:
Let’s say you took out a mortgage of S$500,000 at 2% to finance a property worth S$650,000. After a certain period of time, your outstanding loan balance becomes S$300,000 and your home value appreciates to S$750,000. You notice that another home loan package is offering a lower interest rate of 1.5%.
Due to these developments, you want to refinance your home loan. You could apply for up to 75% of the current market value of your home, depending on the bank policy. That sums up to roughly S$562,500, which is more than your outstanding loan balance.
If you apply for the maximum amount, or any amount larger than your outstanding home loan balance, the excess money could be used for expenditures such as home renovations, debt consolidation or other things that require a big cash outflow.
However, be aware that if you borrow more than your current outstanding balance, you will increase the principal amount owed to the bank. This means more interest incurred over the tenure of your loan.
If you opt to apply for the exact amount to cover your current outstanding loan balance (in our case S$300,000), you will simply repay the old loan with the new one, with no additional cash borrowed.
This can result in lower monthly payments or shortened loan tenure with the same monthly payments. At a glance, it does makes sense to consider refinancing your home loan every time the interest rates drop.
From the comparison above, you can see how the difference of 0.5% affects...