When You Should and Shouldn’t Refinance Your Mortgage
Dewi, an online retail shop owner, had been steadily paying her Home Loan mortgage for the past four years at an average of 7%. With Indonesia’s robust economic growth, Dewi’s online business picked up and she suddenly found herself with more money in her savings account. What can she do to bring down her home loan debt? LiveOlive explores refinancing as a tool that Dewi can consider in managing her debt.
When You Should Refinance
1. Drop-Down Rates
Interest rates fluctuate all the time, but the mortgage you’re paying remains the same at a fixed rate. Negotiate with your bank when they offer a lower interest rate. Lowering your current interest rate can mean paying a lower payment, giving you more money at the end of each month, which you can then reinvest in other products.
2. Pay Faster Because You’re Richer
Dewi found herself with more money: business is booming, her investments came back with a good return, and she even cleaned up her credit card debts. She can request her bank to refinance her loan so she can bring down her debt and pay faster. Of course there would be “Closing Cost” and Penalties, but – depending on the calculation – this would free up her money, allow her to start another investment that will generate higher returns, and recoup the fees she’s paid earlier.
3. Need Cash
If you need to pay for your child’s tuition fee, renovate your home, or possibly buy that vacation home you’ve always wanted, you can use the equity in your home to refinance. A cash-out refinance is a good way to use the equity you’ve built up in your home.
A key factor in determining when you should refinance is how long you plan to stay in the house. If you intend on staying in your home for more than six years, and you can get a better interest rate, it generally makes sense to refinance since you’ll likely recoup the closing costs over your time there.
When You Shouldn’t Refinance
1. You’re Thinking of Moving Anyway
If you’re looking to move in a couple of years, refinancing might not be a good idea because you wouldn’t get a chance to break-even with the closing costs.
2. Don’t Waste Your Money
You’ve been paying for almost 8 years on a 10-year loan then it may not be worth to refinance. Within a certain amount of time you begin paying down the principal and paying less interest. At this point, refinancing will likely cost you more instead of just keeping your current loan.
Watch Out for Fees!
Bear in mind that in refinancing, banks have varying fees. It’s best to negotiate with a bank officer first, to see whether these following fees can be waived:
After talking with her bank, Dewi was told that she can join a new refinance program with a lower rate and no penalty for faster payment. She decided to refinance her 15-year mortgage and is now more focused to develop and expand her business in Jakarta.