Entrepreneurs – let’s stop talking about business operations for a while and start talking about more personal matter: Your home loans.
I’m a big believer that in order to make an impact, entrepreneurs need to be savvy in two major aspects of their life: Their business life and personal life. In term of personal life, one of the most important issues you need to take care is personal finance.
In this article, we focus on one aspect of your personal finance, namely home loans.
The whole idea of taking loans is to get the most at the least costs. When you take a home loan, you may want to get a longer term of payment at lower interest rates.
The reason is pretty simple, really: longer term means lower monthly loan repayment amount; lower interest rates mean lower monthly interest payment. It’s great if you can pursue both, but in any cases, lowering your monthly expenses is always a great idea, as it keeps your cash flow healthy.
But what if you have already taken a home loan and just discovered that there is a way to lower your monthly mortgage repayment, monthly interest rate payment AND mortgage period? Not only cutting monthly home loan expenses, you also save years of loan payment by reducing your mortgage period. It should be everyone’s endeavor to improve incomes and lower expenses, right?
Well, there is a way.
Home loan refinancing
In term of mortgages, you often heard about “refinancing.” But what does it mean, exactly? Simply put, refinancing – in general – means you replace existing debt obligation with another debt obligation under different terms.
Refinancing home loans means that you replace your current home loan with a new home loan arrangement under different, more advantageous terms.
Here are some typical reasons why you might want to refinance home loans: Lower your monthly interest payment, reduce monthly loan repayment amount, alter risks (e.g. switching from a variable-rate to fixed-rate loan,) freeing up cash for renovation, freeing up cash for paying off your other debts, and so on.
But the question is, do you really need to refinance your home loans? To answer the question, here are some issues about home loan refinancing you should be aware of.
1. Why are you refinancing in the first place?
Before you decide on anything, you need to understand about mortgage refinancing. You need to bust some myths and misconceptions so that you are refinancing in the right reasons. Otherwise, you could end up creating unnecessary costs and efforts.
Ask this question to yourself: Why do you need to refinance your mortgage?
Here are some resources that I think will help you in answering the question:
- http://www.getrichslowly.org/blog/2013/03/21/5-reasons-to-refinance-your-mortgage/
- http://www.foxbusiness.com/personal-finance/2013/05/21/dont-fall-for-these-10-mortgage-misconceptions/
- http://en.wikipedia.org/wiki/Refinancing
2. Effort vs. benefits
Just like most loan applications, refinancing requires you to prepare and submit paperwork – plenty of it. With that being said, you need to decide whether the savings you can get via refinancing worth the costs and effort. In other words, what’s the ROI of your effort?
Saving, say, 3 percent of your home value through refinancing might not worth jumping through hoops, but cutting 10 years off your mortgage and saving tens of thousands of dollar are good reasons to do so.
3. How long will you own your home?
This is a tough question to answer, but in order to decide whether refinancing is for you or not, you need to be able to – at least – estimate the length of your home ownership.
Looking at the ROI factor, you can actually calculate the amount you save via refinancing and see whether it makes sense to refinance. Here’s an example:
Let’s assume that you manage to save $150 per month via refinancing. The closing costs for the new loan is $3,600. Then you need 24 month ($3,600/$150) to recoup the costs.
The next question with that scenario is: Will you still be the owner of your home for at least 24 months to make your refinancing effort worthwhile? If not, then you might want to stick to your current mortgage.
Here’s a calculator which can help you decide: http://money.msn.com/home-loans/refinance-calculator.aspx
Takeaway
Refinancing is not for everyone. It should be a well thought out decision to make, as it can alter the outlook of your personal finance.
Please consider the paperwork and costs involved in taking a new loan, and ponder whether taking it worth the effort and risk. If the refinancing doesn’t greatly impact your bottom line and/or your personal finance plan, I personally can’t see any reasons why you should refinance your home loans.
On the other hand, if you calculate your way to home loan refinancing really well, you can save thousands of dollar.
But don’t take my word for it, as I’m not an expert in this field. I recommend you to speak with trusted agents and experts to guide you through the murky road of home loan refinancing.
The bank you have a relation with for some time might be a good starting point. Please bear in mind, though – your bank might make things easier for you, but the bank might not be giving you the best monthly savings.
So, there you go – good luck in your refinancing endeavor!