So you’ve been paying for your dream home and you know you have enough money to purchase it, but you’re also considering mortgage refinancing and you’re not sure where to start and how it goes. Well, first, you need to know what you’re dealing with.
Like in any other instance of financial decision-making, it is best to weigh the pros and cons first before taking the plunge, so to speak. One thing we’re all sure of is that you need to be certain that you don’t invest your life savings into a big mistake – after all mortgage refinancing is a big decision, and so is paying in lump sum cash.
Before you sign any mortgage agreement, ask these 10 questions to make sure you’re making the right more that makes the most financial sense:
1. CASH VS. REFINANCING: What to choose?
You may want to know first which works better for you by knowing the benefits of a cash purchase versus mortgage:
Advantages of a Cash Purchase:
Cash purchases save money and time – Obviously, cash purchases lead to fewer costs. You won’t have to pay any banks or financial institutions any monthly or yearly fees. No mortgage, no upfront and hidden fees, NO INTERESTS! Cash purchases also save buyer’s (and seller’s) time: no need to meet after purchase and less documents are required.
Cash purchases convey peace of mind – cash purchases bring a sense of security. You will never have to worry at a certain time and day of the month over a number of years about covering your mortgage. Best of all, outright job loss, natural calamities, or any similar unfortunate events won’t risk the full ownership of your house to any foreclosure. Moreover, in case of financial emergency, you can use your house as equity for quick cash.
Advantages of a Mortgage Personal Loan:
Cash purchases can exhaust your savings – You can’t use money you already spent, and paying for an entire mortgage in cash means big expenditure. What you have in return, though, is also an asset that can be liquidated and converted into a sum of money. Outright purchase converts a liquidated asset, which is your cash, into a fixed asset, therefore weakening your current ratio. Most companies prefer you use available credit funds or time purchase plans.
Mortgage Personal Loans are flexible – Getting a mortgage loan would be a better option if you want more flexibility on the payment or you expect to need your funds at a later time. Also, if you want to allocate the money left for other purposes like investments and businesses for the money to grow, or save it for possible emergency situations.
Value of Property may diminish – Some people aren’t willing to take the risk of paying in cash because, if you pay in cash and the value of your house, for some reason, falls, then your investment value also falls, especially in an unstable market. But, if you have a mortgage, you share the risk with the bank or financial institution, who shares interest in the value of the property.
Sometimes, it’s not just what you choose between cash or loan, your current overall situation also matters and it should affect what decision to make.
2. How young are you?
If you’re in the prime of your life and have promising income, mortgage refinancing may work for you, and odds are better for you to qualify for a better arrangement. But, if you’re older, even with great savings, mortgage lenders may consider you as a credit risk. Given life expectancy, it’s no surprise banks may think twice about lending you money, so it’s better if you purchase in cash and relax in your new home.
3. Do you have a steady income?
Of course, income will be a significant factor. If you have steady income, it will be more likely that financial institutions will lend money to you. Monthly income or a job or business, not inherited money, will be a big factor because, of course, it means you can make steady repayments.
4. How many other financial obligations do you have?
Tying a large amount of money up with a mortgage may not be a wise decision if you have a big financial decision to make for your dependents soon. If you have a family – tuition fees, cars, and other expenses will be significant factors that are also prioritized financial obligations.
5. Do you have enough funds?
If your investment will wipe out your life savings, spending big to own your home immediately may not be a good financial move. It will leave you nothing for unexpected situations. Financial experts recommend that we should always have readily available funds to cover the next six months of living. So, if buying a house through refinancing will still leave you financially comfortable, it might make more sense for you.
6. Do you need to make any big purchases in the near future?
If you can put other big-ticket items on hold for a while, you can consider refinancing, but if you can’t, it may not be advisable. Financial experts suggest you don’t take out new debts at the same time. Some people think this way: “The bank will see I just got a new car, they’ll grant me money.” Unfortunately, it doesn’t work that way. Financial institutions will think that if you have a new car, thus new payments, how will you pay your mortgage with them? It is important to manage all your payments comfortably.
7. Do you have the time? Are you on the right timing?
Though the question is basic, it shouldn’t be overlooked. If you’re busy with work or with other major obligations, you may have to wait until you have more time to deal with the details of your mortgage refinancing. It may be a big mistake to take out another mortgage now because you may fail on the repayment that may cost you more.
8. How good is your credit score?
Why is it important when you are just refinancing a mortgage personal loan? Here’s one reason: Lenders may use your score to decide whether or not you are worth the risk of having a loan, and if ever you’re granted with the loan, how much interest to charge you if you get it.
Now, what’s a good score? FICO and Beacon scores are today’s most frequent used scoring structure by the banks and financial institutions. It ranges from 300 to 850. They are more likely to accept a score of around 600 for you to avail your mortgage loan. Of course, the higher the score, the better.
9. Will you likely qualify for a good rate?
It will all depend on your credit score. But if it’s low and you don’t qualify for the lowest advertised rates, is it still worth it to refinance? It only makes sense to refinance if the mortgage loan is going to be better for you financially, right? Then, look for the lowest interest rate, which is a good indicator of how much you could be saving.
10. How long do you plan on staying in this home?
This may be one of the most important questions to ask yourself because if you are planning to move out within a year or so, mortgage refinancing may not be a good idea for you. For example, if you save RM10 a month with your refinanced loan, but the loan costs you RM240, you’ll need to live in your new home for 24 months before you’ll start saving money. Look at your family goals first before engaging to a new financial decision.
If you’re deciding whether to obtain a mortgage loan or pay cash for an upcoming house purchase, chances are you’re in pretty good shape financially. However, taking these ideas into consideration will help you make the right decision based on your unique circumstances and position in life.
Ian G. Elbanbuena is a blogger and entrepreneur who writes on various topics mainly finance, self-improvement, business and marketing. At present he works on behalf of Compare Hero, Malaysia’s leading comparison website. This portal helps individuals in saving money by comparing rates from different personal loan providers. Twitter@elbanbuenaian