How Does Refinancing A Home Loan Work – Is it really a clear decision to choose a cash-out or cash-out when your home loan is about to end the lock-in period?
This is a dilemma that many homeowners face, especially those refinancing or repricing for the first time. What is the best financing option? Is refinancing really worth all the administrative hassles? Would it be better to stick with your current bank?
How Does Refinancing A Home Loan Work
Enter Andy and Ling, a couple who bought their first property 3 years ago. They still haven’t decided whether it’s better to reopen another bank or return the money with their existing bank.
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What are the important factors that they should analyze in order to make the right decision, and what are the things that they can choose to do? Let’s find out:
In general, the tenure of the home loan depends on the monthly installments to be paid. Simply put, you need to pay off your entire loan in X years:
How much you can borrow (loan-to-value) also depends on your (the borrower’s) age. If the loan term and your age are over 65, there will be a cap on the amount you can borrow. For joint borrowers, average years are used. For Andy and Ling it will look like this:
How much have you paid off your home loan? For Andy and Ling, it had been 3 years since they started thinking about refinancing when they started their 25-year career. These 3 years are the total time spent on the home loan, meaning that they have about 22 years left.
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Considering all these factors, Andy and Ling chose a longer tenure of 25 years so that they would have more capital (positive cash flow) with lower monthly payments . However, they know that this will draw on the home loan for a longer period of time, which means they may have to pay a higher interest rate overall.
When they did the financial planning, they could have chosen a shorter loan term of 10 years (probably a lower interest rate overall). However, as the couple wanted the situation to have a good cash flow for future events such as having children, caring for their elderly parents, or difficult weather conditions like the ongoing Covid-19 pandemic and the potential recession, it was really slowing it down. . If something happens that affects their monthly income and expenses, they may find themselves without money when they need it.
/POSB’s range of attractive home loan packages with 2-, 3- or 5-year lock-in periods and different tenors can meet Andy and Ling’s needs. Alternatively, they can consider a floating rate package without lock-in.
For example, when you refinance you go to another bank and thus incur legal/standard fees of S$3,000 and above. When you shop again, you get a better rate from your current bank; But a change/adjustment fee may be charged which is about S$800.
Does Refinancing Reset Your Loan Term?
If you go out on your loan during the lock-in period, there may be an early redemption fee. Here’s an overview of the costs involved, which can help you decide whether to finance or return the purchase.
/Those who choose to refinance through POSB can enjoy cashback for loan amounts of at least S$250,000 (completed HDB flats) and S$500,000 (completed private properties). The minimum loan amount for all home loan packages is S$100,000.
This is interesting for Andy and Ling as the outstanding loan amount for their HDB flat is above S$250,000. They can use cash discounts to reduce legal and inspection fees if they choose the renewal option. Also, their current bank offers a free rate option, so they are still torn between the two.
In addition to getting a home loan with a good interest rate, also look for cooperation with other bank products – existing customers can get a high bonus interest on their savings account and benefit from a special interest rate other banking products.
Refinancing Your Home Loan
Andy and Ling each have their own Multiplier account, a savings account that offers a nice bonus profit. Let’s say they also owe their salary and use their /POSB credit card. That counts as 2 eligible transactions. By taking a home loan through /POSB, they add another part of the transaction, which adds to the bonus interest rate.
Because the couple pays more (or pays more) at a better rate than their original home loan, they pay less on their home loan each month. That saves more money, which means more savings and more bonus profits.
Home loan offers customers an attractive interest rate on their repair loan. Although Andy and Ling have already renovated their property, they may want to consider renovating their house in the future.
Besides, POSB home loan customers get 3.88% p.a. from 2.68% p.a. Enjoy a renovation loan at a low promotional rate from For Non/POSB Home Loans.
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Another benefit enjoyed by new and POSB home loan customers (HDB only) is the provision of 6 months of Home Payment Care, an insurance coverage plan by Chubb Insurance.
If you plan to use the remaining amount (after setting aside the necessary emergency funds and insurance) instead, you can save the money in your CPF Ordinary Account (OA) for retirement planning. leave the job. In addition, your CPF nest egg earns 2.5% annual interest, which is not to be sniffed at.
There are home loans with lock-in periods and others without (but they have a floating interest rate, or it can be slightly higher).
Now, after home loan interest rates have decreased due to current market conditions, it makes sense for Andy and Ling to work with their bank to lock in a long-term home loan so they can benefit from the low interest rate environment.
What Is Mortgage Refinancing?
However, in “normal” times, buyers may not want to lock in for a long time, lest good market conditions or good offers occur. People can refinance if their financial situation has changed and they need to extend their loan term (a maximum of 30 years is being considered) to reduce their monthly payment of the mortgage.
If Andy and Ling are considering selling their property after the limited tenure is up, they may not want a home loan with a long lock-in period to avoid penalties when they buy a home. loan (ie sell their home). ).
Existing home mortgage customers may have a variable lock-in period depending on their contract. Andy and Ling can lock in lower rates faster because the purchase takes 1 month compared to 3 months if they refinance their home loan through another bank or mortgage.
Now that Andy and Ling have a clear idea of what options are available to them, they are stuck on the old dilemma – fixed or floating rates? Which one is more effective or suitable for them? Find more answers in this article.
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Andy and Ling took out a home loan of S$700,000 with Bank A for 25 years at 2.35% p.a. (fixed) and lock-in period of 3 years. Now that they are out of lock-in soon, they are wondering whether to renew with Bank A or renew with Bank B.
Although buying money through Bank A has a higher interest rate than withdrawing money through Bank B, after deducting fees, they can save more (about S$3,000) if they return they pay. Of course, there are other factors such as subsidies, cooperation with other bank products, penalties paid and the interest rate after the lock-in period that can change the refinancing process.
Check your credit details with the /POSB payment schedule calculator to see if it makes sense for you to pay.
Will you be out of your lockdown soon? Find out how much you can save if you renew or repurchase with /POSB.
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Plus, check out some great planning tools for your homecoming tour. You can keep your detailed budget and income schedule reports! When refinancing your mortgage, you have two options. If you refinance or change the terms of your existing loan to get a lower interest rate, it’s called a refinance rate and term. If you want to take some money out of your home—perhaps to make renovations, pay off debt, or pay for college—you can take out a home equity loan.
Consider refinancing to replace an existing loan or consolidating two loans into one loan. With the old (mortgage) and the new. After renewal, the old loan will be paid off and replaced by a new one.
There are many reasons to consider refinancing. The savings are obvious. In August 2008, the average 30-year mortgage interest rate was 6.48%. Since the financial crisis, rates on the same type of debt have been steadily falling. In December 2012,
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