Refinancing your home loan allows you to pay off your existing mortgage with a new loan from a
different lender. This is often a good strategy to take because you replace the initial loan with a home
loan that has better terms, so you can complete your payments faster or more comfortably. It can help
make your monthly or total loan repayment more manageable and easier on your finances.
Generally, refinancing your home loan is a good option in most conditions. But there are instances when
it may not be the best choice for your particular situation. If you’re given the opportunity to refinance
your home loan, assess the new loan scheme and consider these factors before making a decision:
The New Loan’s Interest Rate
Ideally, the new loan you get has a lower interest rate than your current home loan. Otherwise, you
don’t really get the benefit of loan refinancing. If you find a lender offering a reduced interest rate by at
least one percent, consider taking advantage of it. Doing so will help you pay less throughout the new
loan term.
If your current home loan has a variable rate, refinancing it to a fixed interest rate is a practical choice. A
variable rate means your monthly amortization can increase as interest rates rise, depending on market
conditions. When home loan rates go up, you might encounter challenges with repaying your old loan if
the new amortization exceeds the budget that you’ve set. But if you refinance to a home loan with a
fixed rate, you can be certain your monthly payments will stay the same and be within your budget
throughout the repayment period. In this case, refinancing your mortgage makes sense.
The New Loan’s Repayment Terms
Refinancing also offers you the option to either extend or shorten your current mortgage term.
Depending on your financial situation and reasons for refinancing, either option can be beneficial.
Longer payment terms can have reduced monthly payments, which you might find appealing. Even if it
means paying for another 10 or 15 years, you can have significant savings every month with a longer
repayment term. This is a good choice if you have a steady income and plan to live in your house for
many years. Otherwise, an outstanding mortgage can affect your property’s value if you intend to sell it
before you pay off the loan.
On the other hand, a shorter mortgage term will allow you to pay off your home loan sooner. Even if
you pay the same amount or a higher amortization on a refinanced loan, it may be in your best interest
to clear your debt as soon as possible. It will also help build your home equity faster and allow you to
sell it for a better price should you wish to do so.
Your Monthly Budget
Before choosing to refinance your home loan, consider your current financial capacity. If your income
has increased and you have the ability to pay off your loan sooner, getting a shorter home loan is a
viable option.
In comparison, a lower interest rate on a refinanced home loan can help reduce your monthly mortgage
payments. This can happen whether the new loan term is the same as or longer than the first loan. If
you have cash flow issues or irregular income, a lower-interest home loan can ease the financial burden.
Also, keeping a low monthly amortization ensures you can manage the loan repayments. As a result, you
won’t incur unpaid balances or default on your loan.
Old Loan Agreement
Apart from what the new loan can offer you, you must also consider the effects of refinancing on your
old loan. Check your old loan agreement before jumping on refinancing it. Find out whether or not the
home loan has a lock-in period and for how long. If your loan has surpassed that time, refinancing your
home loan is feasible, and you won’t have to worry about incurring hefty penalties.
Refinancing Fees
Similar to the process of getting your old loan, refinancing it may come with certain fees that might be
costly. As a start, your property will need to be appraised again to ensure that the loan amount is within
the range of the home’s market value. Here in the Philippines, the appraisal fee can cost anywhere from
PHP 5,000 to PHP 7,000, depending on the location of your property.
Additionally, you need to pay for registration, processing, administration, and pre-termination fees.
There may also be other incidental expenses you’ll need to settle, depending on what’s required to get
the new loan and close the old one. Take these fees and charges into consideration before you
refinance. You might end up losing money or paying more compared to retaining your existing loan
agreement.
Home loan refinancing offers a great opportunity to improve your finances. However, you need to
carefully evaluate certain factors to determine whether getting a new loan will truly be beneficial for
you and help you settle your debt. Don’t be afraid to shop around for the lowest rates and most
competitive terms, and compare different refinancing packages before finalizing your decision.
Remember to carefully read the terms and conditions of your loan so you can select the refinancing package that best works for your situation.
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