How to refinance your home loan

It is not uncommon for homeowners to think of refinancing their home loans after a few years of paying their mortgage.

It might be because they want to save money, or even perhaps because they need money.

If you are currently paying a higher interest rate than the current market rate, you may wish to take advantage of better interest rates. You can then refinance your existing loan to lower your existing interest rate and save on mortgage expenses. This can be done by renegotiating loan rates with your current bank.

A change in lifestyle - such as entering retirement age and trying to survive on a reduced income - may make some keen to make some changes to their monthly mortgage.

In this case, they may choose to restructure the loan to lower the payment amounts. You may be paying higher interest rates but making do with more manageable monthly payments.

Tip: Opt for a fixed rate - with the repayment amount remaining the same from month to month. If the proceeds from the home loan have been used to get cash out, it is likely to be cheaper than obtaining personal loans, or maxing out the balances on credit cards. Once the loan is set, the payment amount remains the same from month to month throughout the course of the loan.

Meanwhile, if you're thinking of refinancing your home loan because you need money, you can then use it to monetise your asset.

After years of paying your home loan, effectively, you have been building up the equity, or value, of your house. And although you can sell the unit to take advantage of the rise in home prices, you may prefer other options because you still want to stay in the place. You then have two choices: Take out a home equity loan or do a cash refinancing.

A home equity loan allows the borrower to use the equity as collateral. A lien is created against the borrower's house. A line of credit or a loan is taken in addition to your existing mortgage. It does not replace the old mortgage. You receive a lump sum when you close the loan.

Cash-out refinancing completely replaces your existing mortgage, with new terms and conditions. You receive a lump sum when you close the refinance.

Most people use the lump sum for paying off hefty debts, particularly those with heavy interest rates, home improvements or repairs, hospital bills, and overseas education for the children.

Home refurbishing is an underestimated responsibility. After a certain time, every home needs to be refurbished, and that can cost a bit of money, running into the tens of thousands of dollars.

Refurbishing raises the value of the unit, so it is both consumption and necessary investment.

A word of caution: Refinancing is not a good idea if:
a) The property value is going southward. You will end up paying heavy mortgages for an investment declining in value.

b) You intend to move house in the next one to two years. Any monthly savings will not be larger than the cost of refinancing.

c) You have almost finished repaying your mortgage. Why start from scratch again?

For more information on home loans, check out this website to find out more.