If you are a first-time homebuyer or are thinking of purchasing a house sometime in the future, you may have heard of the term mortgage. To put it simple, a mortgage is basically a loan secured by the collateral of a specific real estate property. The reason why mortgages are used because it provides individuals and business owners to make large real estate purchases without necessarily paying the entire value of the property upfront, thus giving them time to pay the estate in installments plus interest. The borrower will eventually own the property when finishes all the loan repayments.
The interest rate of mortgages can be in various forms. One of which is using a floating rate, i.e. Prime or HIBOR, as the base rate plus an interest spread. This means that the interest of the monthly repayment may change according to the floating rate.
Another type is a fixed-rate mortgage in which the borrower pays the same interest rate for the fixed-rate offered period of the loan. The borrower’s monthly principal and interest should be the same from its initial mortgage payment until the end of the period.
What is Mortgage Refinancing?
Refinancing a mortgage is either shifting the current borrower’s loan to other lender or getting additional financing on top of the current borrower’s loan. The details on the new mortgage loan terms can be customized specifically to meet the client’s needs which include the mortgage rate, loan tenor and amount borrowed. Some of the reasons why borrowers refinance their mortgage because they may wish to have a lower mortgage rate, wish to pay off their home more quickly, or use their home equity to do other investment or fund for home improvement. The common refinancing reasons are:
- Rates and terms – this involves changing the terms of the old mortgage as well as its rates. It may also include changing the loan tenor and base rate.
- Cash-out – this involves an increase in the loan amount. The extra borrowed amount can be withdrawn by the borrower.
How to refinance your mortgage
After determining your reasons and goals for refinancing your mortgages, certain documents are required. Some of which include:
- Income Proof – Homeowners are required to submit proof of income for the past 1-3 months. This is to ensure your affordability to pay off your new mortgage instrument and other debts that may have incurred lately. For self-employed borrowers, lenders may require you to show your company’s 2-year financial statement for review. This is also important for banks to perform a stress test on the application.
- Tax Demand Note – this document provides further proof of employment and income. Many of which require at least two years’ worth of relevant information.
- Credit Report – Prior to being approved for a refinance, most lenders will perform a credit check.
- Statements of Outstanding Debt – this involves documenting your current outstanding financial obligations from all remaining debts, including existing mortgage, personal instalment loan, car loans, and etc.
- Statement of assets – this involves copies of statements for savings accounts, retirement accounts, stocks, bonds, and certificates of deposits which serve as proof of any additional assets you own in addition to your regular salary.
After gathering the following documents, now is the time to move forward with the application process. This includes contacting a reliable lender to get a loan estimate. After which you are free to submit your documents and wait for further instructions to secure a successful refinancing. Good luck!