Home Loan Refinancing Basics

In recent years, millions of homeowners in Malaysia have taken advantage of low rates and refinanced their home loans. This article describes the advantages and possible pitfalls associated with a home loans refinance.

Before You Start:

• Remember that refinancing to reduce debt or shorten the loan tenure can be a smart move, but refinancing in order to borrow more for consumer purchases (car, vacation, etc.) could set you back significantly.

• Read your home loan agreement carefully on your current package to learn whether you'll be assessed penalties or fees for "getting out" of that loan early.

• Make sure you know whether you have a fixed or variable interest rate and what the terms are.

Home Loan Refinancing Basics

In recent years, Malaysian seeking to take advantage of low interest rates have lined up to refinance their home loans. In fact, refinancing hit an all-time high in 2008, and remained high in 2009, according to a famous Mortgage Broker in Kuala Lumpur.

But while it's true that refinancing has the potential to help you reduce the costs associated with borrowing money to own a home, it is not necessarily a strategy that makes sense for every individual in every situation. So before you make a commitment to refinance your home loans, it's important to do your homework and determine whether such a move is the right one for you.

To Refinance or Not

The old and arbitrary rule of thumb said that a refinance only makes sense if you can lower your interest rate by at least two percent for example, from 9 percent to 7 percent. But what really matters is how long it will take you to break even and whether you plan to stay in your home that long. In other words, make sure you understand and are comfortable with the amount of time it will take for your overall savings to compensate for the cost of the refinancing.

Consider this:

If you had a $200,000 30-year mortgage with an 7.75 percent fixed interest rate, your monthly payment would be $1641.90. If you refinanced at 5.5 percent, your new monthly payment would be $1375.77, a savings of $266.13 per month. Assuming that your new closing costs amounted to $2,000, it would take eight months to break even. ($266 x 8 = $2129). If you planned to stay in your home for at least eight more months, then a refinance would be appropriate under these conditions. If you planned to sell the house before then, you might not want to bother refinancing. (See below for additional examples.)

Remember: All Mortgages Are Not Created Equal

Don't make the mistake of choosing a home loan based only on its stated fixed interest rate, because there are a variety of other important variables to consider, such as:

• The term of the mortgage - This describes the amount of time it will take you to pay off the loan's principal and interest.

• The variability of the interest rate - There are two basic types of mortgages: those with "fixed" (i.e., unchanging) interest rates and those with multi tier on variable rates, which can change after a predetermined amount of time has passed, such as one year, three years or five years. While conversional home loan package with fluctuate interest rate usually offers a lower introductory rate than a fixed-rate mortgage with a comparable term, the BLR could jump in the future if OPR rise. If you plan to stay in or keep your home for a long time, it may make sense to opt for the predictability and security of a fixed rate, whereas an BLR might make sense if you plan to sell before its rate is allowed to go up. Also keep in mind that interest rates hovered near historical lows in recent years and are more likely to increase than decrease over time.

• While a "no-cost" or "zero points" mortgage does not carry this up-front cost, it could prove to be more expensive if the lender charges a higher interest rate instead. So you'll need to determine whether the savings from a lower rate justify the added costs of
paying points. (One point is equal to one percent of the loan's value.)

• How Much Would You Save - A homeowner with a 30-year, $200,000 mortgage charging 8% interest would pay $1,468 each month. The table below illustrates the potential monthly savings and the various break-even periods that would result from refinancing at different rates.

Rate After Refinancing	New Monthly Payment	Savings	Months to Break Even*
7.5%	$1,398	$70	29
7.0%	$1,331	$137	15
6.5%	$1,264	$204	10
6.0%	$1,199	$269	8
5.5%	$1,136	$332	7
5.0%	$1,074	$394	6

*Assumes $2,000 closing costs. Rounded up to the next highest month. If you opt for 'no-cost' or 'zero entry cost' refinance package, normally your home loan will be locked by lender for certain period of time.

Stick With What You Know

Finally, keep in mind that your current lender may make it easier and cheaper to refinance than another lender would. That's because your current lender is likely to have all of your important financial information on hand already, which reduces the time and resources necessary to process your application.

But don't let that be your only consideration. To make a well-informed, confident decision you'll need to shop around, crunch the numbers, and ask plenty of questions.

Summary

The decision to refinance should only be made if the long-term savings outweigh the initial expenses. To calculate your break-even point, divide the cost of the refinance by your monthly savings. The resulting figure represents the number of months you will need to stay in the home to make the strategy work.

With most of lenders offer 'no-cost' or 'zero entry cost' refinance package, opt for it if you have not plan to sell your property in near term. Also evaluate the term of the loan, whether the interest rate is fixed or variable, and the relative merits of paying up-front fees in exchange for a lower rate. Your current lender already knows you and has your financial information on file, so you may be able to get a better deal that way, instead of going to a new lender. To get the best possible refinancing deal, you'll need to shop around, crunch some numbers, and ask a lot of questions.

Home Loan FAQs