Refinancing your home loan in the Philippines is not as simple as calling the bank and informing them that you want to do so as soon as possible.
It can be complicated because there are a lot of factors to consider. However, with a little bit of research and this trusty guide, it’s not that difficult to navigate.
Take note, there may be more effort involved this time compared to when you first bought your home, so before you go ahead with your refinancing plans, here are some of the things that you need to know.
What is refinancing?
Let’s say you purchased your dream house ten years ago and you have been paying off your mortgage religiously. But now, you’re considering swapping out your existing home loan for a better one. Ideally, one that has a lower interest rate.
This is refinancing. It’s paying off your existing home loan with a new one from a different lender.
You can refinance when you want to want to reduce your monthly payments, or when you want to settle your home loan and use the remainder for other purposes, like redecoration or renovation.
Refinancing works when the terms and rates for the new loan are lower or more favorable than your existing loan.
It does not clear your debt for you though. It settles one loan, but you still need to pay off the new loan (hopefully with better terms). It essentially gives you the opportunity to revise your loan scheme with payment terms that are easier on your finances.
Reasons to refinance your home loan
Before you begin the process of scouting for banks and speaking to loan officers about refinancing, it’s best to determine why you want to refinance in the first place. This way, you’ll know what kind of loan you need in order to best address your financial situation.
Choosing to refinance your home loan depends on a lot of things. The most common of which is the desire to avail of lower interest rates.
In most cases, refinancing is a good decision, especially if you plan to live in your house for many, many years.
It’s also easier to get approved for refinancing because you already are a homeowner with an existing home loan.
If you have been paying off your mortgage for several years now, you have already established a good amount of equity, making your refinancing a lot easier on your budget. These factors make refinancing a worthwhile endeavor.
On the other hand, if you’re refinancing your home loan because you need cash to pay off a huge debt, it may be more detrimental to your finances because of the additional years that you need to fully pay off your mortgage.
Filipino homeowners and refinancing home loans
Most Filipino homeowners refinance their home loans to reduce their monthly amortization.
Paying for a house is a huge responsibility, and it usually takes the biggest chunk of a Filipino family’s monthly budget. It’s only normal to find other viable ways to stretch the budget.
This can be made possible by taking advantage of lower interest rates from another bank and having them pay off the old loan.
This can reduce the monthly payments but extend the loan period to another 5 or 10 years. It’s really quite appealing to choose a lower monthly payment, even if it means paying for the next 20 years. The savings that will be made every month make the longer tenure acceptable.
Other Filipino homeowners also choose to refinance to shorten the mortgage term and build up their home equity much faster. This happens when their income capacity has improved significantly and they can now afford to pay for a higher mortgage.
There are some homeowners who opt to refinance so that they can switch from a variable rate home loan to a fixed rate home loan.
After paying their loans with fluctuating interest rates for several years, they now wish to have something that is fixed from here on out.
Lastly, Filipinos refinance their homes simply because they want to use the cash to fund another investment, or to pay for a home improvement project, or to pay for bigger, more urgent debts.
Pros and cons of refinancing
Refinancing can be helpful when you want to improve your financial situation by reducing your monthly amortization and the corresponding interest rates.
It can reduce your risk with a shortened mortgage period or a fixed rate mortgage as well.
As mentioned, the extra amount that you will receive from your refinanced home loan proceeds could also help with your other financial obligations, like home renovations or debt consolidation.
Refinancing fees and charges.
But with the closing of your old home loan comes a new one, which you will be paying for the next 10, 15, or 20 years. It also comes with a flurry of fees that can be really costly.
Just like the first time you applied for a home loan, there are fees that you need to pay when you refinance.
Your property will be appraised again, and the appraisal fee in the Philippines ranges from 5,000 to 7,000 PHP depending on whether your property is located within or outside of Manila.
There are registration fees, processing fees, admin fees, insurance premiums, pre-termination fees, and other incidental expenses to be collected as well.
It’s absolutely critical to take into account the closing costs so that you will not end up losing more or paying more when you refinance.
Refinancing is subject to fixed rates and repricing.
Most banks in the Philippines offer fixed pricing periods for up to 20 years.
BPI’s interest rate for a fixed pricing period of 5 years is at 8.50% per annum, while BDO’s fixed pricing period for one year is at 6.50% per annum. The longer the period, the higher the interest.
You will need to decide if you want a fixed rate or a variable rate on your refinanced home loan.
Loan lock-in periods apply.
They say there’s never a bad time to refinance. But if you must do so, it’s advisable to do it after your lock-in period to avoid incurring hefty penalties.
Documents and requirements must be in order.
Secure a copy of your updated home insurance policy because this will serve as proof that your property is covered and that you are paying for the premiums.
You need to have your income and tax documents ready to prove that you have the means to pay for the refinanced home loan.
The property title will also need to be verified, and there will be checks done to see if there are any changes in your property tax.
How to Save on Refinancing
Do your research. Compare the rates of different banks, and make sure that you read the fine print.
Never make assumptions, especially when it comes to money matters and financial obligations.
Interest rates may vary from bank to bank, but don’t let low interest rates be your only deciding factor. Make sure to include other fees and costs as well.
Opt for a fixed rate mortgage.
Sometimes it’s better to know that things will remain the same for a certain number of years. At least, as far as fixed rate mortgages go.
It will help you sleep better at night knowing that you will be paying the same amount for your house over the next couple of years.
You don’t need to concern yourself with changing interest rates, and you can better prepare for the future because you know just how much you need to have.
When in doubt, don’t hesitate to ask!
Aside from looking for the lowest and most competitive rates and terms, compare different refinancing packages. Ask questions and always read the terms and conditions of your loan.
When you know what’s truly being offered by different banks, you can choose the best refinancing package that works for your budget, regardless of how many years you need to pay for it.
If refinancing is your most viable option, make sure that you take advantage of lower interest rates. Make the commitment to maintain a good credit standing so that you can pay off your loan without a hitch. Refinancing the right way can drastically improve your loan situation in the long-run, so make sure you put the effort in now so you can reap the rewards down the line.