Refinancing your home loan is a brilliant way to save money. It can lower your monthly bills, pay off your debts sooner, and increase your liquidity. But some people (you know the type; they’d smoke pot in full view of a police car) still manage to mess it up. Time and again, people allow five common errors to ruin the benefits of their refinancing. Take note of them:
What is Refinancing?
In Singapore, it’s common for home owners to refinance after the first three to five years. This process transfers their home loans from one bank to another. It’s most commonly done to ensure their interest rates are the lowest on the market, or more rarely, to pay off the loan faster. Our previous article goes into more detail.
Refinancing is usually painless, unless you go about it the wrong way. Guard against these avoidable errors, and you’ll get the loan package you want:
1.Not Shopping Around
Not all banks offer the same rates. And because the market fluctuates, the bank offering the best rate now may not be doing so next month. Banks also like to offer teaser rates; the rates may be especially low for two years, but climb drastically on the third.
Because of the huge amounts involved, even minuscule shifts in percentages can translate to thousands. With a $1.1 million home, for example, a drop of 0.5% can translate to having another $5500 a year. Banks are also known to “blitz” the market every now and then; for example, by dropping the home loan rates to rock bottom prices for three years, then rapidly inflating them.
With variable factors like SIBOR, SOR, and shifting IBRs, you’re doing yourself a disservice by being impatient (or too lazy to refinance). I know maths isn’t the greatest Sunday afternoon activity, but this homework will save you thousands.
2. Not Understanding Contract Clauses
Does your bank offer you a one-time freebie if you reprice? Do you have a lock-in period that isn’t over yet? Too many home owners don’t pay attention to these key clauses.
If you refinance your house before your lock-in period, for example, you’ll end up paying 1.5% of the loan as pure penalty. For the aforementioned $1.1 million home, that’s $16,500 wasted. There’s also the right of clawback; some home owners aren’t aware that this clause can extend beyond their lock-in period.
On the other hand, some home owners are needlessly terrified of lock-ins; if you’re going to get a low interest rate, you’ll want to stay with the bank for awhile. Why should a lock-in period bother you?
Be sure you understand every little nuance of the contract before you sign.
3. Major Credit Applications During or Near Refinancing
Do not, for the love of all that is financially sane, seek additional sources of credit when you’re refinancing.
If you’re going to buy a car, or apply for a new credit card, it can wait until your house is settled. In extreme cases, refinancing applications have been scuttled because of this. See, banks decide how much to loan you based on your existing credit score; that’s the one which doesn’t include the $130,000 Honda you intend to buy next Friday.
Even applying for a credit card before refinancing can have an impact. Banks are paranoid about customers who suddenly take out huge loans; they’ll assume you’re either (1) flying off to Swaziland with the goods forever, or (2) committing financial suicide in one spectacular bang.
4. Change Jobs During or Near Refinancing
Changing jobs while refinancing is like putting on weight before bungee jumping. Maybe nothing will happen, but if something does, it’ll be spectacular and hilarious for everyone except you.
When you change jobs, your new salary and benefits are important factors. If your pay is going down, that might scuttle the deal. If your pay is going up, there may be a better deal you could have gotten. At the very least, you’ll be faced with more paperwork than the pop-up section of a children’s book store. Be prepared to resubmit all your income documents, or to wait until your CPF statements reflect your new job.
5. Forget Your Closing Fees
Set aside at least $5000 for incidental closing fees. This will be used to cover things like clawback, or any related legal costs. While it’s not cause for an anxiety attack, you want to minimize your credit card use. You’re better off saving up and paying off these fees at one go, rather than putting them on a 24% APR credit card.
Get More Advice!
Before refinancing, visit MoneySmart’s Refinancing Wizard. This free-to-use site gives you information on the latest refinancing packages. Just enter your property type and loan amount, and select the “refinance” option. You’ll be presented with the best rates from all local banks. The site’s mortgage specialist can also call you directly to advise you.
Do you have any questions about refinancing? Comment and we’ll get back to you!
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Tags: Home Loans