For those who are looking to rearrange their finances, refinancing is a great option as it helps to give them more control over their 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 things to read up on so that you don’t end up making a very costly mistake. Here are the top five biggest ones to avoid!
1) Misusing Refinancing
Although there is no limit on the number of times you can refinance your home loan, it is not necessarily a good idea to do it every time you need some extra money.
Bear in mind that each refinance will come with incurred closing costs and fees which could take months or even years to get back, leaving you with more debts in the long run.
This is an important point because your eligibility for refinancing is not only also influenced by the amount of equity in your home, but also your credit score.
Financial institutions may reject your application if your credit score is lower than it was the last time you refinanced.
2) Not Doing Your Homework
Please don’t just go for the first refinancing ad that pops up on your Facebook page, regardless of how low the rates are.
It’s true that a 0.05% difference in percentage on your rate may seem small, but can lead to big savings over the span of your loan.
However! It’s also important to find out the fees involved, as well as the terms. Take your time in doing your research to make sure you get the best deal.
3) Underestimating (Or Overthinking) Interest Rates
While doing your homework, don’t focus only on the interest rates. In fact, a lender offering a low refinance rate may end up charging a lot more than another lender offering a higher rate.
Remember, closing costs can vary between lenders, and a low interest could be used to cover the high fees.
Before applying for the loan, make sure to ask about loan origination rates, points, credit reports, or any other fees.
Once you have researched the rates, it is crucial to act fast. Trying to anticipate future drops in loan rates may backfire, causing you to save less money, or rendering your refinancing plan obsolete.
4) Not Calculating Finances And Long-Term Plans
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 sell off the house.
5) Falling For “No-Cost” Loans
Some lenders may promote “no-cost” refinance, but 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 spot any inconsistency, and 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, so choose wisely!
All in all, if you have done your maths 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!
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