By Adlene Hanna
For those of you looking to reorganise your finances, refinancing is a great option as it helps give you more control over your monthly commitments.
Cash-out refinancing, in particular, is a popular option as it allows homeowners to take out as much as 90% of their current property value, making it ideal for those who need extra cash flow for investments or rainy days.
However, before you jump into a consultation with your financial advisor, there are some important mistakes you want to try and avoid.
Although there is no limit on the number of times you can refinance your home loan, it is not a good idea to do it often. Bear in mind that each refinance comes with incurred closing costs and fees which could take months or even years to recoup, leaving you with more debts in the long run.
This is an important point because your refinancing eligibility is not only influenced by the amount of equity in your home, but by your credit score too. Financial institutions may reject your application if your credit score is lower than it was the last time you refinanced.
Regardless of how low the rates are, don’t fall for the first refinancing ad that pops up on your Facebook page. The slightest difference in percentage on your refinancing rate can lead to big savings over the span of your loan.
It’s also important to find out the fees involved, as well as the terms. So, be patient in doing your research to make sure you get the best deal.
Underestimating interest rates
Your homework shouldn’t be solely focused on interest rates. In fact, a lender offering a low refinance rate may end up charging a lot more than others who are offering a higher rate.
Closing costs also vary between lenders, and a low interest could be used to cover the high fees.
Before applying for the loan, make sure to confirm loan origination rates, points, credit reports, or any other fees. Once you have researched the rates, it is crucial to act efficiently.
Not seeing the big picture
Other than keeping your Loan-to-Value and Debt-to-Income ratios balanced, you also need to calculate the breakeven point to ensure the refinancing is truly worthwhile.
Calculate the gross closing costs and how much money you’ll save each month by refinancing your mortgage. To figure out how long you’ll have to stay in the house to recoup your refinancing expenses, divide the transaction costs by the monthly savings.
For example, if the costs come to a total of RM5,000 and you save RM100 per month, you will break even in 50 months (4 years). But if you save only RM50 a month, it will take you double the amount of time to break even – during which time you may consider moving or even selling off the house.
Falling for ‘no-cost’ loans
Some lenders may promote “no-cost” refinance. Similar to the low interest rates, this is just another marketing strategy, where the closing fees are bundled into your final loan amount. Again, it is important to enquire about the exact breakdown to avoid falling into this trap.
If you are lucky enough to apply during a promotional period, you may even find a lender which covers all costs, including legal fees, stamp duty and valuation fees.
All in all, if you have done the math and are sure that refinancing is the right choice, then go for it. What’s important is that the numbers make sense – and you are prepared for the paperwork.
Knowing your property’s value can help you calculate how much you may be eligible to cash-out. For a free home value estimate, head on over to Property Advisor’s Refinance Calculator now!