Refinance is to make a loan to cover the former loan by paying the capital, interest and related fee to free the mortgage asset, which is considered a legitimate act to be done in front of the land officer. Then the freed asset will be used as a collateral to a new housing loan to be completed in front of the land officer.
It might sound complicated but the new loan creditor will take care of contacting the officer and other managements as its new customer.
This also won't affect the former financial institute as it has surely calculated and made a contract not be disadvantaged of. Whether the repayment is paid by the contracted time or premature, they are benefited by the interest and, in the rather case, the premature redemption fee.
People refinance for many reason, mostly to reduce the amount of monthly installment to enhance fluidity. The conditions of refinancing is that the new financial institute must offer lower interest rate in order to help save up some money as well as better loan conditions such as the loan expenses, premature redemption fee, etc. Make sure other expenses or expense-to-be will not overthrow the benefit-to-be.
However, refinancing is like making new loan . Loan expense are not evitable including:
- Mortgage fee or 1% of the new mortgage amount paid to Department of Lands
- Revenue stamp at 0.05% of the new loan amount paid by the borrower, collected by the Department of Lands
- Property assessment at approximately 0.25% of the assessed price
- Fire insurance coverage depends on the value of the house. Fire insurance coverage can use a former or new policy, depending on the new financial source. Usually the policy for the fire insurance coverage is a short one of 3 years and is renewed when refinanced.
- The general entrance fee at the fixed interest rate at 0.5-1% of the loan amount paid to the new financial source. However this fee might not be charged in some banks. When calculated all these expenses, a refinancing or the cost of changing the financial source marks 2.5% of the refinanced amount and this cost does not include the premature mortgage redemption fee from the original financial source of 0-2% of the remaining loan amount to be paid to the former loaner.
This is the key factor to be considered before refinancing; the loan interest rate of the new financial resource should be lower than the old one by at least 4-5% to worth the cost.
