How to Save Money Through Refinancing
The most common reason for refinancing is to save money.
Some ways of saving money through refinancing can be achieved by
- Obtaining a lower interest rate that causes one's monthly mortgage payment to be reduced.
- Consolidating debts such as credit cards with the refinance so overall monthly payments towards debt are greatly reduced.
- Reducing the term of the loan, thus saving money over the life of the loan. For example, refinancing from a 30-year loan to a 15-year loan might result in higher monthly payments, but the total amount of the payments made during the life of the loan is reduced significantly.
People also refinance their homes to convert their floating rate loan to a fixed loan. One of the main reasons why home owners had refinanced in 2007, is because their current mortgage is of a floating status (or approaching the floating status). The main reason behind this switch is to obtain the stability and the security of a fixed loan. Fixed loans are very popular when interest rates are low, while floating loans tend to be more popular when rates are higher. When rates are low, homeowners refinance to lock-in low fixed rates. Conversely, when rates are high, homeowners switch to floating loans to obtain lower payments. In 2008, the Singapore Government is expected to raise interest rates in order to fight inflation, therefore experts predict that more home owners will refinance to floating packages, especially to packages pegged to the SOR (Swap Offer Rate).
The answer to the question "Should I refinance?" is a complex one, since every situation is different and no two homeowners are ever really in the exact same situation. Even the conventional wisdom of: refinancing only when you can save 2% on your mortgage, is not really true.
If you are refinancing to save money on your monthly payments, the following calculation is more appropriate than the rule of 2%:
Calculate the total cost of the refinance (example): $2,000
Calculate the monthly savings (example): $100/month
Divide the result in 1 by the result in 2 - in this case 2000/100 = 20 months. This shows the break-even time. If you plan to live in the house for longer than this period of time, it makes sense to refinance.
By: Zeng Han Jun, CPCG, Singapore
Article source: http://www.cpcgonline.blogspot.com
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