What does refinancing means?

For example: You have just decided to buy your dream condo in Bishan. Let's say you do not have the financial means to buy the condo by paying full in cash. What happens? You approach a bank to take up a mortgage. The bank pays off the full sum of the condo for you and you have to pay the bank back in installments. There are several terms and conditions that you have to agree, before taking up your housing loan. These terms can be the interest rates, penalties involved, legal fees and etc. This housing loan is known as your first mortgage. You could have agreed upon a fixed rate mortgage, such that the interest rate remains the same over a couple of years. After a few years, the interest rate that you have no longer stay fixed. It begins to change with market condition. Perhaps the interest rate that you are having is moving with an upward trend, and you decide to scout for another mortgage with a lower interest rate. After spending so much time visiting so many banks, talking to so many bank officers and preparing so many different documents required by different banks, you decided to change your first mortgage to the next bank with the lower interest rate. This process of changing to another bank is known as "Refinancing".

What are the kinds of pitfalls that I might encounter?

By refinancing, you have the option to change the terms and conditions of your first mortgage. There are many things to consider, such as the benchmark that your mortgage is pegged to, the loan tenure, legal features and etc. Ultimately, by refinancing your mortgage, you must be able to save money by paying less installment, paying less interest, removing the name of the previous co-owner who may be the wife/ husband that you have just divorced and etc. By now, you could be thinking to yourself: "Since refinancing is such a good way for me to save money, why not do it right now?" Hold on a minute buddy. Refinancing is not for the uninformed. Refinancing requires you to know what you want to achieve by doing so. The main pitfall of refinancing comes from the lack of awareness. If you are not aware of why you want to refinance or the pros and cons of the deal recommended to you. You could be taken advantage of by your bank officers who just wants to hit their monthly quota so as to keep the mouth of their team leader shut, so he will stop asking them about their quotas in the meetings.

You could be thinking now: "I can ask my bank officer about the terms and condition! No problem at all! Tap on their brain." Wait a minute. Given such a high turnover rate for the banking sector, the bank officer that you are asking may have just gotten the transfer to the mortgage department. However he or she could be very experienced too. If that is the case, you could really tap on his or her experience but there is a pitfall here too. Here is the scenario if you decide to use their advice: You visited 2 banks to ask about the rate and found two competitive packages from each respective bank. You want to compare the two bank packages but would you approach any of the bank officers from the respective banks? Most probably, they will play down the benefits of the other package and sell their product to you. Are you truly getting the best deal from the advice of your bank officer in such a scenario? Definitely not. You might get even more confused than when you have started out in the first place.

You might ask your housing agents for some referral and try to get you to refinance your mortgage However they might get you to refinance even though you do not really benefit from the deal at all. I am not trying to downplay housing agents. I respect them and they are the experts in selling off properties, but are they trained in mortgage? They might introduce a bad deal to you unknowingly, even if they have your best interest at heart.

Here is an example that might happen:

You have a mortgage loan of $200,000 from Bank A at 6%.

Bank B offers you a 5% mortgage interest rate.

By refinancing you will save $2000.

However if you are not aware of the legal terms in the Bank As contract, and several penalties kick in. Maybe the penalties total to $3000. Then you will have negative savings of $1000 if you refinance. That means by refinancing, you have lost $1000 instead. All these problem arise by working with the wrong advisors.

It is best to talk to an experienced mortgage specialist who is unbiased so that you can find out if refinancing is really for you. There are many pitfalls that you might encounter if you choose to work with the wrong advisor. Choose your advisor carefully and see if you are comfortable with his or her working style. Talk to an advisor that really listens to your needs and addresses to them. He or she will be able to advise you on the pros and cons of different deals and determine if it is truly viable for you to refinance when you will be selling off your property.

The writer works in CPCG, which is based in Singapore. He specializes in mortgage advisory and business brokering services.

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