Should I do a refinance with my mortgage loan?

The most common reason for refinancing is to save your money. Some ways of saving your money through refinancing can be achieved by:

1) By obtaining a lower interest rate that causes one's monthly mortgage payment to be reduced.

2) By consolidating debts such as credit cards with the refinance so the overall monthly payment towards all debt is greatly reduced.

3) By 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 of the payments made during the life of the loan can be reduced significantly.

4) People also refinance to convert their floating rate loan to a fixed loan. One of the main reason why home-owners had refinanced in 2007, is because their current mortgage is floating or getting ready to floating. The main reason behind this type of refinance is to obtain the stability and the security of a fixed loan. Fixed loans are very popular when interest rates are low, whereas floating loans tend to be more popular when rates are higher. When rates are low, homeowners refinance to lock in low fixed rates. When rates are high, homeowners prefer floating loans to obtain lower payments. In 2008, we expect the Singapore Government to raise interest rates in order to fight inflation, therefore we predict that more customers will refinance to floating packages, especially to packages pegged to the Swap Offer Rate.

5) Homeowners also refinance to consolidate debts and replace high-interest loans with a low-rate mortgage. The loans being consolidated may include second mortgages, credit lines, student loans, credit cards, etc.


The answer to the question "Should I refinance?" is a complex one, since every situation is different and no two homeowners are 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.

Sometimes, you do not have a choice––you are forced to refinance. It may also be that you would like to fix your floating rate mortgage, or your floating loan is getting ready to adjust to a much higher rate.



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