Buying a house is a highlight in everybody’s life. From villas to apartments to independent houses, individuals can now procure the home of their dreams. The only issue is the finance with which a house is to be purchased. However, customers need not worry about financing as they can avail home loans from various banks and financial institutions within the Philippines at attractive rates of interest. Loan refinancing is also another option.
What is loan refinancing?
Refinancing, as of currently, is not a very well known notion within the Philippines according to a survey conducted in 2009 by Bangko Sentral ng Pilipinas. Refinancing, is quite a common practice elsewhere and this term refers to the option wherein an existing debt commitment is replaced with another debt obligation but in different terms. In other words, it refers to customers repaying their debt by taking another debt. The rules and regulations governing this kind of financing varies based on the area, country and other socio-economic factors such as the political situation of the nation, stability of currency, bank regulations and also the credit report and score of the customer, credit rating of the country and so on. The most common of all refinancing is that of primary residency mortgage. In cases of loan replacement in times of financial stress, it might be known as ‘debt restructuring’.
Reasons for loan refinancing in the Philippines
There are many reasons why debts are refinanced
- If customers want to take advantage of an interest rate that is better than the one available or monthly payment that is low or a loan repayment term that is reduced.
- If customers want to merge all their existing debts into one single loan.
- Customers can also opt for this option so as to reduce the repayment amount every month and this often done for a longer tenure.
- If borrowers want to reduce or eliminate risk such as switching to a fixed loan from a variable one.
- Borrowers also opt for refinancing if they want to free cash, often for a longer tenure.
Other reasons for customers to opt for refinancing are -
- Customers who want to reduce their overall interest rate and payment, can opt for this. Customers who plan to live in their home for a long time can pay a point or more as the cost of mortgage amount will be paid for by the amount saved. But if the customer is planning to shift then they may not stay long enough to recover from mortgage refinance amount. Hence it is imperative for customers to calculate the break even point and see if refinancing is a feasible option or not.
- Customers who want to avoid balloon programs can opt for this. These kind of payments are great for reducing the initial payments made every month, however at the end of the term, if the customer still owns the house then the mortgage amount would still be due.
- This option is also great for those customers who want to obtain cash equivalent to their home’s equity for increased income. This income can be put to use for a variety of needs and reasons.
A novice’s guide to home refinancing in the Philippines
Customers should opt for refinancing so as to obtain another loan at a better interest rate and term and when the first loan is paid off, the second one is created. This option is good for those with an impeccable credit score as they can convert a loan with variable interest to one with a fixed interest rate and a lower one at that. However, it is risky for those with a bad credit score.
The most important reason compelling customers to choose home loan refinancing is the interest rate. Customers with an impeccable credit record and good credit scores have it easy while they procure loans at reduced rates of interest. This is one of the reasons why customers refinance their loans with their mortgage companies as doing so will ensure that they save hundreds of pesos every year.
Another reason why people opt for refinancing is so that they can obtain the finances required for large purchases such as to pay off credit card debt, procure cars and others. This is done by taking a home equity line of credit. Then this amount is used to clear the original mortgage with the remaining amount being loaned to the house owner. Also with improvements on a particular home, the value of it also increases and a substantial amount of home equity loans or lines of credit can be obtained.
However, with every advantage, there also comes a few disadvantages
One of the most important risks that customers need to be aware of is the penalty that may be incurred due to paying the existing mortgage with their home equity credit. This is because, in most agreements there is condition allowing these companies to charge a fee for doing this and the fee amount can run into a lot of money. Therefore, before customers opt for refinancing, they need to ensure that penalty is covered and is not burning a hole in their pockets.
Apart from this, refinancing also comes with its set of additional fees and charges. Some of these include, paying attorneys to make sure that they get the better end of the deal and also take care of complicated paperwork and bank fee. Customers need to look around and research to avoid the bank fee as much as possible. Hiring financial experts is also advised.
What can customers to do refinance and when should they do this?
Refinancing is essentially another loan, therefore customers must find out if they can repay the loan and how they will accomplish this. In case they want to use the home equity loan to improve the house and subsequently its value, then this option seems feasible, however if this loan is being used for purposes such as tuition fee, vacation and such then customers have to decide how they will repay the loan. Also customers must look at how refinancing will impact them in the longer run.
Refinancing is usually allowed after customers hold their original mortgage for at least a year as per the requirements of banks and financial institutions. This time period might vary, hence customers must look at all possible options and then decide. Although customers can refinance with their original lender themselves, it is not necessary. However, doing so will make the process easier.
Tips for customers looking to refinance within the Philippines
- Customers need to decide their budget and how much they would want to borrow, well in advance.
- Customers will also have to check their original mortgage documents as there may penalties imposed on refinancing and these penalties may run into a lot of money.
- Customers need to also shop around for lenders and choose the one providing terms and conditions that are to their financial advantage even in the long run.
- Customers have to thoroughly research all the interest rates, tenures, penalties, terms and conditions and go for the one that is most suited to them, financially.
- Consulting a financial expert who has a thorough knowledge of rates, fees and documents would aid customers in making the right choices.