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5 Reasons Your Plans To Refinance The Mortgage Might Fail
If you have gone through the hectic process of sieving through mortgage deals in the last few years, you are sure to have come across teaser rate home loans.
These are the type of mortgages that have unbelievably low interest rates in the initial first few years of the tenor.
After which it will rise either due to it switching to a floating rate, or due to a structured increase.
Bankers and brokers will then reason with you that these are the most attractive deals on the market and that you can always refinance your mortgage after the years of the teaser rates expire.
Sounds familiar? You are not alone.
Lenders are some of the smartest corporations consumers will ever face-off with in life.
They hire the best people, draft their contracts that leaves them with all the leverage, and can punish you by blotting your personal credit record. And they secretly hope that you will not switch banks via refinancing either due to sheer forgetfulness, or simply being unable to.
If you think that you can get one over a lender, you must be dreaming.
And if you are tempted to take on one of these types of loans, here are some huge issues to consider… because your plans to follow the strategy of refinancing after the interest rates spike can become just wishful thinking.
1) You no longer have a strong income
It used to be that almost anyone without a disastrous credit record would be able to refinance their housing loans as long as the are able to walk into a bank.
Those were the days… and they are long gone.
After the catastrophe that is 2008, many lenders no longer entertain real estate refinancing cases when the borrower does not have an income strong enough to support the mortgage.
This means that even if you had an income substantial enough to get the initial mortgage approved, your income could be deemed too weak in the current financial climate to support the loan.
These calculations include ratios that are not the topic of discussion here.
Sometimes, unique circumstances could also push you into such situations.
For example, you have retired and no longer draws a stable income, if any. Or that the main bread winner in the household have passed away unexpectedly. Or maybe a guarantor for the first mortgage is not willing to be a guarantor again for the refinance.
There can be many more reasons.
But the bottom line is that your personal or household income is no longer substantial enough to maintain the mortgage.
Thus, no refinance for you.
This can also be caused by government policies, which leads up to the next point.
2) Government policies
Many, if not all, developing and developed countries are experiencing property booms in this day and age.
And with the frightful memory of the mortgage crisis still fresh in mind, many governments have implemented policies to curb or slow down the spectacular growth of real estate prices especially in major cities.
One such example is Singapore.
In an effort to put the brakes on spiking home prices, some of the national policies introduced into the market was financial and credit based. Leaving many buyers and homeowners unable to borrow significant loan-to-value (LTV) for both buying and refinancing.
You could very well have accepted the initial mortgage when the times were good.
But by the time comes for refinancing, the rules of the game have changed. Leaving you with an expensive loan which you cannot refinance.
3) Existing rates are much higher
While your mortgage plan might have always been to refinance to a better rate once the teaser rates expire and higher rates kick in, this tactic will only make logical sense when you are refinancing to a lower interest rate.
This means that if the current interest rates in the market are higher than what you are already on, it makes no sense at all to move the home loan to another lender.
While this can make you feel better about the situation, you could be in a better position if you had not taken up the teaser mortgage in the first place.
For example, if you had taken up the loan 3 years ago, the odds are there were better rates offering better long term financial savings available. But you were so fixated on the attractive teaser rates and decided on them thinking that you could refinance the loan in future.
Unless you are a short term investors with a short term view, remember that properties and mortgages are long term commitments. So do evaluate your loans from a long term perspective.
4) High switching costs
As mentioned earlier, you would be a fool to assume that lenders are fools.
That cannot be further from the truth.
One of the methods that lenders use to retain customers is to make it as expensive as possible for them to switch their borrowings to other lenders.
Fees that you could incur when moving banks include:
- Redemption penalty
- Cancellation penalty
- Legal fees
In view of these charges that can run up to thousands of dollars, any savings you might be able to make by moving your mortgage to another lender could immediately be wiped out.
You can expect a lender to absorb or reimburse a number of costs associated with closing when they first acquire a customer. But you cannot expect them to be just as generous when you are leaving them.
However, if you are lucky, the new lender you are moving to might take on these expenses for you
5) Home value drop
While real estate values tend to appreciate over time, it is not a given.
Since the value of a property is a key factor determining the amount a lender would be willing lend for a property loan, it is essential that the value of the house is still significant enough.
There can be cases where the value of a house is too low for a desired loan amount.
For example, if you are took on a $800,000 mortgage at 80% LTV initially on a home valued at $1 million, you might be ready to refinance it 3 years later when the outstanding balance is left with $700,000. At this point if you are to take on a new loan to replace the old one at 80% LTV, the value of the house has to currently be in the range of $875,000. Should the real estate market crash during the last few years and the value of the house is now worth below $875,000, you wouldn’t be able to fully refinance the existing loan.
However, if the real estate market has been booming, and the value of the house increased, the value of the house should be of little issue.
You might even be able to squeeze out more cash by tapping on a home equity loan too.
Finally, be mindful that you cannot assume that refinancing is an entitlement which you can call on when the time comes.
Many homeowners have been burnt this way. And they are left with expensive home loan which they are struggling to pay off.
Don’t be another victim and think through your options carefully when considering teaser rate mortgages.